Real estate investment trusts (REITs) or real estate funds provide another entry point for those looking to invest in commercial real estate. It is particularly attractive to those who want to own commercial property, but want to take a hands-off approach to day-to-day management activities.
Commercial real estate was once seen as an “alternative investment”, but it is becoming more mainstream. Due to the high costs associated with owning income-generating properties, most individuals are limited to purchasing small multi-family or small business properties.
A real estate investment fund that raises capital from several investors, and then the fund sponsor oversees all of the fund’s activities, including property management in the case of a fund that buys, renovates, and/or holds real estate for a period of time.
Investing in a REIT is a great way to generate passive income for those who want to own real estate, but don’t want the responsibilities of direct ownership.
In this article, we look at everything you need to know about REITs, including their many benefits, how they are structured, and how profits are generated and returned to investors. Read on to find out more.
An investment fund is a pool of capital put together on behalf of multiple investors. There are many types of investment funds, such as mutual funds, money market funds, andhedge funds.
A real estate investment fund (REIT) is a specific sub-group of funds that focus exclusively on investing in income-producing real estate.
A REIT is generally led by a sponsor with years, if not decades, of experience in the real estate industry. The fund manager will carefully analyze all individual opportunities, and then implement these opportunities using the capital from the fund.
REITs can be structured in several ways. Some funds are open to the public, while others are only available to accredited investors.
Funds can focus on specific geographic areas, asset classes, andAsset types and more. Most REITs are closed-end funds that target negative risk-adjusted returns for their investors.
A real estate fund provides investors with an opportunity to earn good returns by investing in the growing real estate sector. However, it comes with its own risks and investors should research well before investing.
Usually, investors who do not have sufficient funds to purchase mutual fund properties choose real estate. It is important to note that this investment requires a horizon of at least three to five years.
These funds are not recommended for short term investors. Also, you need to be aware of how the real estate industry works to take advantage of this investment.
There are many different types of REITs that are categorized by private versus public, investment type, geography, and asset type.
In this section we will describe four of the most common types of REITs.
Real estate-focused mutual funds, like other mutual funds, are professionally managed investments that invest in a variety of categories assets In order to create a diversified portfolio.
Most real estate mutual funds invest in shares and bonds of real estate companies (including REITs) and also invest directly in real estate. T
consider mutual funds Attractive to small investors or those who prefer diversified, professionally managed passive income as well as a high level of liquidity.
Real estate-focused private equity funds are identical in concept to all Equity funds Other private, except that REITs invest specifically in real estate.
Real estate private equity firms operate as what is known as a “general partner” (“GP”) and collect money from private investors known as limited partners and invest that money in real estate.
The general partner is responsible for identifying attractive investments and managing the portfolio in order to provide a return for the limited partners’ investors.
The limited partners in private equity funds are usually individuals, families, pension funds, insurance companies, university endowments, or corporations, and they often act as passive investors in the fund.
It should be noted that most investors in real estate private equity funds are accredited investors.
Determine the commission Money bills The exchange defines an accredited investor as someone who has earned $200,000 or more in the past two years or who has a net worth of at least $1 million.
Real estate private equity firms usually raise funds for specific purposes, called “funds,” and are authorized to invest in the subject matter of the fund.
Similar to private equity firms, REITs collect money from large investors to invest in real estate assets.
Unlike private equity firms, debt funds typically invest in large debt or mezzanines secured by real estate assets.
One of the main differences between equity and debt funds is the stability of cash flow in debt funds and the security provided by the property as collateral.
A real estate investment trust, commonly referred to as a “REIT,” is a legal entity that invests directly in real estate or mortgages secured by real estate.
Investors can buy shares in REITs and participate in the income generated by the property as well as in the appreciation of real estate in the REIT portfolio.
It is important for any investor considering starting a REIT to understand how REITs are created and structured and how profits are distributed to investors. Here’s a look at the different phases of a fund.
The first step is to configure the fund. During incorporation, the fund sponsor will set the general criteria for investments.
As noted above, some funds are structured to target investments in a specific product type, such as multi-family investments in primary markets.
Other funds may be more lenient on the types of products and locations in which they invest. Sometimes, a REIT will be set up to have a minimum minimum investment requirement. The inception phase helps to establish the “fences” and goals of the fund.
After the real estate fund is formed, it is officially launched. The launch phase involves announcing to the world that the fund is “open for business” and ready to accept investments.
Most fund sponsors will quietly market the fund during the seeding phase, letting potential investors know their intentions to launch the fund and when.
This allows the sponsor to obtain pre-launch soft commitments, which are non-binding commitments from potential investors. Fund success often depends on the fund manager’s ability to muster a critical mass from these pre-launch commitments.
Fund managers are certainly required to follow strict regulations regarding pre-formation communications.
For example, it should include any promotions and other materials Disclaimer that the pre-launch communication is not a request and that the fund has not yet started.
There are many independent third-party companies that will assist fund managers with fund formation, pre-launch and launch activities.
The fundraising period is the period during which the fund manager actively solicits and accepts investments in the fund.
At this point, the fund must have established capital requirements. This will include an estimated minimum amount of capital that the fund will need to raise in order to be successful.
It’s not uncommon for funds to raise $50 million or more with each show. Fundraising efforts may also include investment minimums, which often depend on whether the fund accepts investments from qualified investors.
Investors may see companies announcing that they have “just closed a fund” or are “preparing to close a fund.” What this refers to is closing the fund once the fund has reached its fundraising goal.
For example, if a fund sets out to raise $50 million, it will close on achieving that final investment that helps the fund get that far.
This relates to ‘closed’ funds in contrast to ‘open-ended’ funds which will continue to raise capital for a set period of time while the active investment phase begins.
The investment stage begins when the fund purchases its first assets. Once the fund begins to invest, its capital is distributed into investments as long as these investments are closely aligned with the fund’s goals.
Typically, funds will have 24 to 36 months after initial closing to distribute the fund’s capital. Interestingly, the fund is not obligated to invest in any assets if the fund manager decides that there are no opportunities that meet the fund’s objectives during that investment period.
The final stage of the fund is the distribution of profits to investors. Most private real estate funds will offer their investors a preferred return in addition to their prorated share of the fund’s total net profits.
However, how the funds are actually distributed depends on the regression structure of the fund. Waterfalls can be complex, often with multiple levels depending on how the fund is structured.
Generally, the waterfall is structured to ensure that the investors get a return on their capital contribution first, followed by a preferred return based on the total amount of their capital contribution.
The fund manager then receives their allocation, which equals a portion of the total preferred return allocated to the investors (usually in the same profit split percentage). Any remaining profit is then generally divided between the investors and the fund sponsor.
The emergence of alternative methods To invest in real estate To open the way for different types and different levels of investors.
Instead of investing directly in a real estate asset and having to actively manage that property, REITs discussed above allowed those without a large amount of capital and those who lacked the time (or experience) to manage real estate and participate in the industry and own and trade real estate.
Each of the above strategies goes a lot deeper into experience, market knowledge, and legal compliance, so anyone interested in pursuing any type of real estate fund should be aware of these implications before getting started.
A real estate fund is a type of mutual funds That invests in securities offered by public real estate companies, including real estate investment funds. REITs pay regular dividends, while REITs provide value through upside.
Depending on their investment strategy, real estate mutual funds can be a more diversified investment vehicle than REITs. Real estate funds provide dividend income and capital appreciation potential for investors over the medium to long term.
The disadvantages of real estate investment are:
Real estate requires money. You need money to make money.
Real estate takes a lot of time.
Real estate is a long term investment.
Real estate can be a problem.
Real estate benefits do not always apply.
Real estate investing has unique risks.
An accredited investor earns an early return on capital and a preferred return on invested capital. The sponsors provide some equity capital, secure investment opportunities, manage the properties and the fund, and earn fees that are usually dependent on their performance.