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 private real estate fund is and how it works, the advantages for the investor, and the type of assets you can expect to find within a private real estate fund.
What is a Fund?
A fund is an investment vehicle in which a large number of people pool their money together in order to invest in securities such as stocks, bonds, real estate, or commodities; this pool of money, collected from investors, is then invested in an effort to make a positive return. Furthermore, funds are generally created to invest in a specific asset class, an example being a Private Real Estate Fund.
Funds are professionally managed and have regulatory requirements to comply with set forth by the Securities Exchange Commission (SEC). Ultimately the goal is to increase the fund's value over time, which in turn increases investor capital.
What is a Private Real Estate Fund?
A private real estate fund is a vehicle that is tailored specifically toward real estate investing. Capital is pooled from several investors and invested into real estate assets for the purpose of creating passive income for investors who want to add real estate to their investment portfolio and don't want the hassles of direct ownership. Some funds specialize in a particular sort of real estate, such as office buildings, distribution centers, or commercial multifamily apartments, while others invest in a broad range of assets.
There are other types of real estate investment vehicles available on the market. Such vehicles are Real Estate Mutual Funds, Real Estate Investment Trusts (REITs), and Real Estate ETFs’. These can be found on the public market and purchased through a financial advisor or an online brokerage. Some investment opportunities are open to non-accredited investors, while others are appropriate for accredited investors only.
How Does a Private Real Estate Fund Work?
Through a Private Placement Memorandum (PPM) the fund offers investors membership interests through the sale of securities; these investors then become Limited Partners (LP’s) in the fund. The fund's General Partners (GP's), also referred to as the managers, invest the LP's capital into real estate assets; some transactions may include debt from banks or other lenders. The GP identifies real estate investment opportunities, manages the investments, ensures returns and tax documents are distributed, and in turn earns fees outlined in the fund documents. The Limited Partners invested amount, which is passive in nature, will correspond to a specified number of units within the fund. Target returns are disclosed to investors via 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 funds do not. Real estate investment funds typically have more flexible investment strategies than mutual funds, for example. This strategy is appealing to investors who want to get into real estate and have at least $50,000 to invest. Here are some advantages of investing in real estate through a fund:
Diversification
Diversification is a common investment strategy in which investors spread their capital across various types of securities and asset classes in order to reduce market volatility. Through a private real estate fund, investors have greater diversification because their capital, risk, returns, and equity multiple are spread across the collection of assets (not just one).
Tax Benefits
Most private real estate funds are intended to generate returns over time and hold assets for longer than a year. Therefore, returns can be taxed at the long-term capital gains rate as opposed to short-term capital gains. Furthermore, investors can benefit from pass-through tax benefits.
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 funds will typically provide returns to the LPs (investors) prior to the GP's.. 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.
Documentation
Investments are brought together and you as the investor now get the benefit of receiving one distribution that covers all the invested deals. You get one tax document as opposed to keeping up or chasing after many for tax season. You sign one PPM as opposed to many, and you get the benefit of having one accreditation cycle and not needing multiple accreditation letters.
Real Property
Real property is permanently attached to a location. An investor can both visually and physically confirm its existence.
Types of Assets in a Private Real Estate Fund
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 are 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, and 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 a Boost
The Boost Wealth Fund is a 506(c) Customizable Private Real Estate Fund (C-PREF ℠) open to accredited investors. Our objective is to deploy investors’ capital, along with the Manager’s equity, to acquire and invest in profitable real estate assets. The Boost Wealth Fund is strictly focused on collaborating with other top-tier operators and negotiate win-win scenarios for our investors. 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 allows 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 is to bring you a seamless and pleasant experience, and most importantly provide incredible value to you, our investors.
