Is a real estate investment fund right for you?

A real estate investment fund is a pool of money collected from investors that is used to purchase real estate that is expected to produce income for the investors. This can provide diversity for investors, access to professional management, great income and rock-solid security. It can also be an opportunity that would otherwise be impossible for an individual. There are advantages and disadvantages to a real estate investment fund – like anything else.

Advantages:

Unlike when you purchase shares in a REIT (Real Estate Investment Trust), when you purchase a real estate investment fund you are actually investing in the real estate within the fund. Your money is secured by the property held by the fund. In a REIT you are merely holding company shares – a company that makes money from the real estate it holds, but your shares are not backed by the actual real estate itself.

On the contrary a real estate investment fund uses your money (and the money of your fellow investors) to purchase land and they then develop that land by erecting a building or situating an income producing business on the property. The fund utilizes their professional management experience and connections to secure the very best deals and begins to generate income from the real estate. This revenue is used to reward their investors with regularly scheduled payments.

The benefits are numerous:

Investors are paid handsome quarterly disbursements. Depending on the fund you can earn 10%, 12% even 15% per year on your investment. Sometimes described as ‘mailbox money’ because all you have to do is go the mailbox and pick up your check. (Of course, most people will arrange for direct deposit so you don’t even have that chore to do).

Prime locations appreciate at a premium rate. Ideally the real estate fund will be purchasing property that is in a prime location. As we all know the 3 most important things about buying real estate is location, location, location. This means that while the fund might have to pay a premium for a good location it also means that when it comes time to sell the real estate it will have appreciated in value tremendously. Which is, of course, exactly what you want.

Instant equity is generated when a building is erected. If the real estate fund has purchased raw land and intends to develop it that can represent a huge boost in the value of that land. This means that your share will be worth much more once the business, apartment complex or hotel has completed construction.

Your principal is 100% secured by the real estate in the Fund. This is a big one. Your investment is backed by the value of the real estate not by the value of the company (as it is with a REIT). This means that your principal is protected by real tangible assets and will not be completely lost, even in a disaster scenario.

You can invest within your IRA to realize all the tax advantages. With a self-directed IRA (regular or Roth) you can defer or even eliminate the taxes you would normally have to pay upon liquidation of your shares. There are some rules you need to follow but it is possible to purchase real estate within your IRA account. This is a great way to invest in your retirement as proceeds from your investment get returned directly to your IRA making it grow even faster.

Diversified away from the unwanted volatility of the stock market. The stock market has been on a major rollercoaster recently. This year it is way down due to the Coronavirus crisis, last year it was up, but 2018 was another down year. Real estate runs on a different cycle from stocks and bonds so it is an excellent way to protect yourself from unwanted volatility.

The Fund ideally has multiple properties that allows the assets to be diversified geographically within the portfolio. If your real estate fund of choice is invested in hotels – for example – you will want one with more than just a single property. Should a hurricane or tornado strike the fund would be devastated. Ideally your real estate fund will have several properties all over the continent or even around the globe.

Hedge against inflation since your income also increases over time. Inflation is what we call the rise in prices that occurs over time. We all have to pay more for food, gas, rent and all the things we want to buy. If the real estate fund is earning income by charging rent then their income will also increase at the rate of inflation and this means you are protected from the erosion in profits that is caused by inflation.

You can realize the economies of scale as real estate funds typically have a multi-million dollar portfolios of properties. This is the understanding that a lot of money will earn more profits than a little bit of money. Imagine you are a real estate developer and want to build a hotel. You will save money by ordering your supplies in bulk rather than individually. Order enough for 4 hotels and your suppliers will give you even greater discounts.

Experienced proven management team. Take advantage of the expertise that resides in real estate fund management teams. These guys do all the research as part of their 9 to 5 job, not just as a hobby. They know what they are doing and won’t fall into rookie mistakes as a regular person might.

If the Fund has houses or apartments or hotels there will be no hassles from renters – they do all the day-to-day managing of the properties. This is also very important. Managing an apartment building or hotel is not easy. It takes time and expertise. You need to arrange for repairs, cleaning, credit checks of renters, advertising, property taxes and so much more. With a real estate fund handling all the day-to-day operations you can sit back and relax all while enjoying the benefits of real estate ownership.

Conclusion:

Real estate investment funds can be a secure source of income allowing you to capitalize on both appreciation, safety and potentially market beating income. You can take advantage of tax laws and invest within your IRA and you have access to not only professional managers but also to a rare opportunity. Namely the chance to piggyback on a very large real estate deal that normally would not be available to an individual. So long as you are not looking for a get rich quick scheme or are not worried about illiquidity (as it can sometimes take time to sell real estate) a real estate investment fund might be the right choice for you.