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What is a Real Estate Fund

What is a Real Estate Fund & How Does a Real Estate Fund Work?

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This article is part of our passive investors guide on real estate syndications, available here.

Real estate funds are an excellent way for real estate sponsors to be armed with capital to take advantage of opportunities in the market. They are also an excellent way for investors to get exposure to different deals, asset classes, and markets, all in one fund.

In this article, we’ll break down what is a real estate fund and how they function.

Key Takeaways

  • A real estate fund is a type of investment vehicle that pools together money from multiple investors and uses it to buy and manage a diversified portfolio of real estate assets.
  • Real estate funds work by offering investors the opportunity to buy shares in the fund, similar to how one would buy shares in a stock.
  • Many investors choose to invest in syndications for one specific real estate deal that they believe in. Some investors prefer to avoid the over-diversification of blending the return profile across several assets instead of investing in one deal they believe and have done their diligence on.

What is a Real Estate Fund? - (Real Estate Fund Definition)

A real estate fund is a type of investment vehicle that pools together money from multiple investors and uses it to buy and manage a diversified portfolio of real estate assets. 

These assets can include commercial properties, such as multifamily communities, office buildings, and shopping centers, and residential properties, like single-family rentals. 

Real estate funds can be either publicly traded or privately held, and they can be focused on a specific geographic region or property type or be more broadly diversified.

How Does a Real Estate Fund Work?

How A Real Estate Fund Works

Real estate funds work by offering investors the opportunity to buy shares in the fund, similar to how one would buy shares in a stock. The fund then uses these real estate investment funds to buy and manage a portfolio of real estate assets. The fund may also borrow money, known as leverage, to increase the size of its portfolio.

The fund is managed by a fund manager or a real estate sponsor who is responsible for identifying, acquiring, and managing the fund’s real estate assets. The manager will also be responsible for deciding when to sell assets and determining the fund’s overall investment strategy.

Advantages and Disadvantages of Investing in Real Estate Property Funds

Real estate funds can be a great way to build long-term wealth passively, but the partnership structure or the thesis of what some might consider “over-diversification” may not be right for all investor profiles. 

There are several advantages and disadvantages to investing in real estate property funds, including:

Advantages

  • Diversification: Real estate funds offer investors the opportunity to diversify their portfolios by investing in a range of different properties and property types.
  • Professional management: As mentioned above, professional investment managers typically manage real estate funds, which can be beneficial for investors who lack the expertise or resources to manage their own real estate investments.
  • Potential for higher returns: Real estate can generate higher returns than other asset classes, such as stocks and bonds, especially over the long term.
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Disadvantages

However, there are also some disadvantages to consider, including:

  • Lack of control: As an investor in a real estate fund, you will have limited control over the specific properties that the fund buys and sells.
  • Over-diversification: Many investors choose to invest in syndications for one specific real estate deal that they believe in. Some investors prefer to avoid the over-diversification of blending the return profile across several assets instead of investing in one deal they believe and have done their diligence on.
  • Fees: Real estate funds typically charge management fees and other expenses, which can eat into your returns.
  • Risk: Like any investment, real estate carries some level of risk. The value of real estate assets can fluctuate due to market conditions and other factors, and there is the potential for the fund to lose money.

Is a Real Estate Equity Fund the Same as a Real Estate Fund?

A real estate equity fund is a type of real estate fund that focuses on acquiring and holding ownership stakes in real estate assets rather than generating income from the assets through renting or leasing. 

These funds are often referred to as “buy and hold” funds, as they are typically focused on long-term appreciation rather than short-term income.

On the other hand, a real estate fund that manages income-producing real estate through renting or leasing is known as an income or yield fund. These funds are typically focused on generating steady cash flow for investors rather than solely speculating on the long-term appreciation.

The Types of Real Estate Funds in Today's Market

There are several different types of real estate funds available in today’s market, including:

  • REITs (Real Estate Investment Trusts): REITs are publicly traded companies that own and operate a diversified portfolio of real estate assets. They are required to pay out at least 90% of their taxable income to shareholders in the form of dividends. The downside with REITs is they don’t come equipped with the same tax advantages of direct ownership that you get through owning an interest in a private real estate fund.
  • Private real estate funds: Private real estate funds are not publicly traded and are open to non-accredited and accredited investors, depending on how the real estate fund sponsor/fund manager structures the deal. But they are typically only open to accredited investors. These funds can be focused on a specific property type or geographic region and may offer solid returns.
  • Real estate mutual funds: Real estate mutual funds invest in a diversified portfolio of real estate-related stocks, such as REITs and real estate development companies. These types of funds offer the convenience of investing in a professionally managed portfolio, but they also carry some of the risks associated with the stock market. These funds also don’t have the tax advantages you get through direct ownership of privately owned real estate.
  • Real estate crowdfunding: Real estate crowdfunding allows investors to pool their money together to invest in specific real estate projects, such as the development of a new apartment complex. These types of investments can offer the opportunity for higher returns, but they also tend to be more risky and illiquid.

Good Read: Property Funds vs. REITs

What is a Real Estate Fund of Funds?

A real estate fund of funds is a type of investment vehicle that invests in a diversified portfolio of real estate funds rather than directly investing in real estate assets. Investors would invest in a fund, and that fund would invest in another active operator’s fund.

These funds offer investors the opportunity to access a diverse range of real estate investments through a single investment. Still, they also tend to carry higher fees due to the additional management layer.

Frequently Asked Questions About What is a Property Investment Fund

The purpose of a real estate fund is to create a diversified investment pool of assets for investors. A manager creates that opportunity and drives the underlining assets’ performance to create a return for its investors. 

Property funds make money by generating and collecting income from rent and other income-producing items from the real estate properties the fund holds. Also, from recapping debt, selling the properties, and closing out the fund. The fund manager makes a fee for managing the assets, as well as an upside in the gains, which is referred to as the “promote.”

What is a Real Estate Fund - Conclusion

A real estate fund is a great way to deploy capital with an operator you believe in. They’re a great way to get exposure to illiquid private real estate deals that aren’t generally accessible to the public. If you prefer underwriting and investing in a single property at one time, then a real estate syndication may be more complementary to your investment style.

If you’re looking to access these privately syndicated value-add multifamily investment opportunities across the southeastern united states, join the investors club here at Willowdale Equity today. 

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