As you continue to implement the preservation and growth of your family's financial future, you spend much time assessing the assets in your portfolio to ensure diversification. In this post we provide an overview of what a real estate investment fund is and how it works, the advantages for the investor, and the type of assets you can expect to find within a real estate investment fund.
What is a Fund?
A Fund is a pool of money collected from investors and invested in an effort to make a positive return. A fund can use leverage in order to boost the fund's potential returns, and will often invest both the investors' capital and borrowed money in order to make investments.
Funds are professionally managed and comply with requirements and regulation set forth by the Securities Exchange Commission. Ultimately the goal is to increase the fund's value over time, which in turn increases investor capital.
What is Real Estate Investment Fund?
A real estate investment fund (REI Fund) is a vehicle through which capital is pooled from several investors to invest in real estate. Real estate investment funds produce passive income for investors who want to add real estate to their portfolios but don't want the hassles of direct ownership. Some funds are open to non-accredited investors, while other funds are available to only accredited investors.
There are several types of real estate investments funds available, such as Real Estate Investment Trusts (REIT’s), which can be found on the stock exchange and purchased through a broker. Private Equity REI Funds that holds real estate directly, where Investors can put their money. Some funds specialize in a particular sort of real estate, such as office buildings or distribution centers, while others are private funds that either invest in a specific asset or invest in a broad range of assets.
How Do Real Estate Investment Funds Work?
To raise capital for real estate investments, the real estate fund sells limited partnership (LP) interests. The fund's general partner (GP), also referred to as the managers, invests LP capital into real estate assets and can also borrow capital from banks and other lenders. The GP provides some equity, identifies real estate investment opportunities, manages the investments, ensures returns and tax documents are distributed, and earns fees based on the fund's performance. The Limited Partners invested amount, of which is passive in nature, will correspond to a specified number of units within the fund. Target returns will be presented to the LP via the fund documents. LP investors typically receive distributions from the Fund before the GP’s do.
What Are The Advantages For Investors?
Private Real Estate Funds offer investors a number of important benefits that other types of real estate funds do not, such as diversification and tax advantages. Real estate investment funds typically have more flexible investment strategies than, mutual funds, for example. This strategy is appealing to people who want to get into real estate and have at least $50,000 to invest. Here are some advantages of investing in a real estate through a fund:
Diversification
Diversification is a common investment strategy in which investors spread their portfolio across various types of securities and asset classes in order to reduce market volatility. Through a fund the investor has greater diversification across multiple assets in multiple markets, the returns and equity multiple is spread across the collection of assets (not just one asset). The returns of real estate funds are not strongly related to the volatility of the stock market. Additionally, real estate demand tends to rise in tandem with population and job growth over time.
Tax Benefits
Most real estate investment funds are intended to generate returns over time. Returns can be taxed at the long-term capital gains rate rather than the short-term capital gains rate, as most real estate investment funds intend to hold assets longer than a year. Furthermore, real estate fund investors may benefit from pass-through depreciation.
Limited Liability
Limited partner means your liability is limited to the amount of your investment. You wouldn’t be on the hook for the entire value of the property, and none of your other assets would be at risk.
Returns
Real estate investment fund will typically provide returns prior to the general partners. This encourages the GP’s to properly manage the funds in order to meet the profit target and keeps the interests of the investors and the managers aligned.
How Do Real Estate Investment Funds Work?
To raise capital for real estate investments, the real estate fund sells limited partnership (LP) interests. The fund's general partner (GP), also referred to as the managers, invests LP capital into real estate assets and can also borrow capital from banks and other lenders. The GP provides some equity, identifies real estate investment opportunities, manages the investments, ensures returns and tax documents are distributed, and earns fees based on the fund's performance. The Limited Partners invested amount, of which is passive in nature, will correspond to a specified number of units within the fund. Target returns will be presented to the LP via the fund documents. LP investors typically receive profit distributions from the Fund before the GP’s do.
Assets Characterized - Risk And Reward Profiles:
1. CORE:
Core properties have stable occupancy, investment-grade tenants, extended lease terms, high-quality construction with minimal to no imminent capital needs, little leverage used (between 40%-50%), and located in very desirable neighborhoods (compared to property type) in large markets. Most of the expected return will come from the property's cash flow rather than appreciation.
When defining the investment profile, it's critical to consider both physical qualities and capital structure. A core asset leveraged to 80% is no longer a core investment.
2. CORE PLUS:
Core plus properties are in good – not exceptional – locations, dependable revenue, high-quality tenants, slightly dated finishes, low to moderate vacancy rates, with little to moderate leverage (between 50% - 65%)
A core plus investment opportunity might be a 15-year-old apartment complex that is in need of some moderate upgrades. Has good occupancy, will generate good cash flow, but needs an allocation to pay for future deferred maintenance like roofing, parking lot repairs, or exterior painting.
3. VALUE ADD:
A typical value-add investment property is in a decent to good location, has dated finishes, medium to high vacancy rate, and some unfinished upkeep. The purpose of a value-add investing approach is to get a good deal on a property and then spend some money on repairs and physical improvements to bring it up to market standards. Renovations can range from small (new paint and carpet) to large (new roof and structural upgrades), all with the goal of attracting new tenants at increased rental rates.
Value-add properties usually have little to no cash flow when they are acquired and tend to require moderate to high leverage (between 65 % –75 %), but they have the potential to generate a lot of cash flow once the value is added.
4. OPPORTUNISTIC:
Vacancy rates are typically high in opportunistic properties. They may require extensive repairs and/or repositioning. Property value appreciation is the primary source of returns, and much of it occurs at the end of the investment period.
Opportunistic properties usually have little to no cash flow when acquired, but it has the potential to provide a lot of cash flow after the value is added. The degree of leverage used is high (70 % or higher); however, this will vary depending on the ability to get financing.
Invest with Boost
The Boost Wealth Fund, LLC is a private real estate fund that will deploy investors’ capital, along with the Manager’s equity, to acquire and invest into profitable multifamily real estate assets. The Boost Wealth Fund is strictly focused on taking advantage of current and upcoming opportunities from distressed sellers who overpaid or are distressed in many ways from the current real estate market. We believe some of the best real estate opportunities can be picked up by those who are prepared during a market shift. Some of these opportunities require us to act fast to get the best possible deal and terms for our investors. The liquidity the fund model provides allow for a competitive advantage in closing preferred deals and if needed can leverage equity over debt.
Success very much depends on a disciplined and mindful approach combined with market appropriate strategies and underwriting. Our team focus it to bring you a seamless and pleasant experience, and most importantly provide incredible value to our investors.
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