How To Set Up A Real Estate Investment Fund

What Are Real Estate Ventures

Real estate ventures are exactly what they sound like: entities that play an integral role in developing and financing most large real estate projects. On the other hand, joint real estate ventures will witness two individual parties team up to take on a single project.

Investing in real estate ventures is one of the most profitable businesses among global investors. Real estate ventures can provide you several benefits, including:

• Equity for the future

• Property appreciation

Mind Your Due Diligence

Entering into a real estate partnership is nothing to take lightly, nor should you do so without thinking about things from an objective perspective. As I said before, you must be confident that you are entering into a partnership for the right reasons, but its equally important to choose the right partner. Not only should they complement your skills to maximize your usefulness, but they need to be someone you trust implicitly. In vetting your potential partner, its of the utmost importance that they can do their job well. Whats more, its up to you to make sure they can. You are the final gatekeeper, so make sure you are comfortable that your partner is competent.

Luxembourg Real Estate Investment Fund Industry Remains Resilient And Continues To Grow

The 15th annual edition of the Association of the Luxembourg Fund Industry Luxembourg real estate investment funds survey highlights how resilient the real estate investment sector in Luxembourg really is. Despite the global Covid-19 pandemic, the industry saw assets under management of REIFs increase by 14.83% over the last twelve months compared to last years 10.54% growth at the same period, bringing total assets under management to EUR 104.4 billion.*

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The Underlying Investment Itself

Warren Buffett has a great saying: When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. The same is true in the real estate industry, and therefore often the first and most important question to be asked about a new opportunity, is what exactly the investment is and why it is worthwhile to make it. The real estate industry is one of the most diverse asset classes available to investors, and it is full of niche strategies and businesses that fit a specific purpose, and offer a certain return. One of the exciting things about real estate is that you can find investments as conservative as low leverage loans on urban trophy assets which have a profile similar to investments in high-credit bonds, all the way to highly speculative development projects that can have returns more like a VC fund or small cap equity investment. And everything in between.

While going through each opportunity available in the marketplace is far too broad a topic to be covered here, its worth keeping in mind that this enormous variety exists. And it is useful to think about how to frame a set of questions that can surface the what of a potential investment. Where does it fit in the spectrum of opportunities?

Plan Your Business Marketing

Having a successful real estate business is synonymous with having a successful marketing strategy. What is your unique value proposition? Answering this question will help you establish a brand for your business and any subsequent marketing campaigns. This is also a great time to settle on a logo, core values, and a mission statement. These components will help inform how you reach out to potential customers and serve as a jumping-off point for your marketing materials.

After creating a foundation for your real estate business, it is time to start your first campaign. Read through the following list of common marketing materials for some inspiration:

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What You Should Consider When Setting Up An Investment Fund

When it comes to setting up an investment fund there are a number of factors to consider that have a direct impact on the most suitable jurisdiction and structure model to pursue. These include not only fund regulatory aspects but also tax, business operations, cost, and commercial aspects.

From a regulatory standpoint, requirements largely differ depending on the type of fund, the underlying asset class and investment strategies, target markets, and your investor base, among many other variables. Financial Institutions such as funds are generally heavily regulated and fund managers assume significant legal liability related to the fundraising, investment strategies, investor relationships, and reporting requirements, among many others.

In this article, we have outlined some of the key aspects that one should consider when structuring their fund. Structuring a fund is a complex endeavor and this article does not intend to be a comprehensive analysis and it does NOT constitute legal or tax advice of any kind. One should certainly seek out professional and legal advice and various service providers before setting up a fund and selling or soliciting investors.

Fees And Carried Interest

With the advent of low cost ETFs and the broad success of modern investment management ideas, its hard to have a discussion about any investment these days without a discussion of fees and carried interest. This is a difficult topic when it comes to real estate investments, as the industry remains somewhat of a Wild West with respect to how sponsors are paid. Most other investment classes have, if not perfect adherence to a standard, at least a basic established orthodoxy about what should be charged and how things should be structured. Not so in real estate funds.

The driving factor behind this is that, first, a real estate investment fund requires varying levels of management time and effort, and, second, are highly structured and capital intensiveand therefore have a wide variety of potential capital options and alternatives that are considered when an investment is made by a sponsor .

Based on the above, for example, a fairly large fee may be entirely appropriate for a development project that requires a sponsor to hire full-time staff to manage and focus on the project, or for a specialized debt investment that requires a large amount of business development time to identify and negotiate new opportunities. Those same fees may be wholly inappropriate for a long-term buy-and-hold fund that is doing nothing more than acquiring properties and sitting on them.

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Real Estate Transaction Fees

Transaction fees are guaranteed. The manager gets paid these fees regardless of how the deal performs. Below are the most common transactional fees:

Acquisition Fee: This fee is most common amongst managers syndicating individual deals. The acquisition fee is usually between 1% and 2% of the total deal size and is generally on a sliding scale. The bigger the deal, the lower the fee. This is a market rate fee and is justified because the manager probably looked at 50 deals to find this one. The manager already paid all of the dead deal and personnel costs out of their own pocket.

Acquisition fees are paid on the total deal size, as opposed to equity invested. This is a significant difference because a 1% acquisition fee on a $30 million property comes out to $300,000. Most properties are typically leveraged using two-thirds debt, so the required equity may only be $10 million, meaning that $300,000 fee equates to a 3% cost of equity invested.

Committed Capital Fee: This fee is typically charged by called capital real estate funds and ranges from 1% and 2% on committed equity. The manager receives this fee even if the capital is not invested. If a committed capital fee is charged, an acquisition fee should not also be collected, as this is what the industry calls double-dipping. Unfortunately, many managers try to get away with double-dipping when serving individual investors, so be careful.

Consider Flipping Investment Properties

This is HGTV come to life: You invest in an underpriced home in need of a little love, renovate it as inexpensively as possible and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV.

There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do, says Meyer.

His suggestion: Find an experienced partner. Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project, he says.

The other risk of flipping is that the longer you hold the property, the less money you make because youre paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up. This works as long as most of the updates are cosmetic and you dont mind a little dust.

» Which is better?Real estate vs. stocks

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How To Start A Reit

You’ve probably heard of REITs as a way to invest in real estate, but have you ever thought about starting your own?

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There are several strategies you can take to investing in real estate. You can buy a single rental property, start a billion-dollar real estate fund, or choose one of dozens of other methods in between. How you choose to structure your real estate business depends on your overall goals and the capital and resources you have available.

One strategy that’s growing in popularity is to raise capital through syndication with a private offering. However, knowing how to start a real estate investment trust, or REIT, may provide you with an option that’s better suited for your situation.

Build A Support Network

As cliche as it sounds, no person is an island when starting a real estate investment business. On the contrary, many leads and deals in real estate will come directly from your personal network. Whether your network consists of clients, colleagues, mentors, or even competitors, make sure to invest ample time in cultivating these key relationships.

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Admission And Withdrawal Of Investors

Since investments in real estate are illiquid, private real estate funds have many unique structural issues that must be addressed. An initial consideration is whether to use an open-end or closed-end fund structure. Many investors favor the open-end structure, which, in the simplest form, allows investors to enter and exit the fund at regular intervals determined by the funds sponsor. However, the illiquid nature of a private real estate funds investment assets often makes the open-end structure unworkable since it presents the fund with the dual problems of establishing a fair value for each contributing and withdrawing investor. Closed-end funds, on the other hand, cause all investors to join the private real estate fund at the same time, removing the issues concerning the initial value of their investments, and restrictions can be crafted to match investor withdrawal rights with the funds liquidity profile.

Meanwhile, giving investors flexible withdrawal rights can cause significant problems for a private real estate fund. It is very difficult to provide timely liquidity from investments in real estate assets because there are really only two ways to accomplish this objective. One option is to arrange for the sale of the real property investment. However, several problems arise with this option, including:

Experienced Real Estate Fund Attorneys

Launching a private real estate fund involves navigating an array of regulatory complexities and business challenges. A real estate fund encompasses unique securities, regulatory, and tax issues. Capital Fund Law Group advises emerging and established real estate and private equity fund managers on all aspects of fund formation and ongoing operations. Our attorneys have structured real estate funds throughout the United States using a variety of structures, investment strategies and jurisdictions.

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How The Fund Makes Money And How Its Distributed

There are two primary ways in which a real estate investment fund makes money. One is property appreciation, and the other is wise investing within the market. These are related, but not always passive. For instance, appreciation can happen because of changing real estate market conditions, but it can also result from investing in property development.

Real estate funds are much stronger as long-term investments not just because they are so dependent upon appreciation, but because they are generally structured to reinvest profits into real estate based on the market. While some pay dividends, they are much more involved in reinvestment than a REIT, which pays 90% of profits in dividends.

How a fund is structured determines how the profits are then distributed. In general, the investors initial investment is paid first. A preferred return is calculated based on several factors and paid to the investor. The funds manager or sponsor is then entitled to a portion based on the preferred return. Finally, remaining profits are split between the investors and the sponsor or manager.

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Plan For Multiple Locations

Loans may take some time to be processed, which could result in the property you wanted being sold to another buyer. Because of this, its wise to come up with a few options for where you are going to source your debt. In order to get a loan, youll need to show that you have a plan in place that will likely result in a good return on investment .

Plan for working with multiple lenders, not just your preferred lender, just you in case you have to come up with a backup plan should things take longer than you expect.

Is An Reit A Limited Partnership

A real estate investment trust is not a limited partnership, though they are treated similarly for taxation purposes. REITs and limited partnerships can both avoid double taxation due to their respective business structures. However, the two entities differ in most other ways, including their investment focus. While REITs are typically in the financial sector, limited partnerships focus most on energy or natural resources. Yet another difference can be found by looking at the distribution requirements for each: REITs must pay out 90 percent of their earnings. Limited partnerships, on the other hand, have targets, but they are not compulsory.

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How Do I Establish A Property Fund

Active Vs Passive Property Partnerships

Partnerships can be structured in a number of creative ways that suit the needs of each individual involved. There are two key types of partnerships: active and passive partnerships.

In an active partnership, each member takes on a part of the workload and has an active role in contributing to projects on a regular basis. All tasks could be split up equally, or perhaps tasks could be split up based on each members level of experience and skillset. However, the idea is that each person involved in the partnership is putting in a direct effort into the collective work.

Alternatively, one or more members could be a silent partner. This means that they are providing capital to fund a project instead of actively participating, thus the name passive partnership. A real estate investor could raise capital from partners who want to reap the financial benefits of investing in real estate without having to directly involve themselves in a project.

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Risks Of A Real Estate Investment Fund

While a real estate investment fund has many benefits, it doesnt come without risks. Here are some of the pitfalls associated with participating in a real estate investment fund:

• Some real estate investment funds are structured to not let investors withdraw capital early, as its a necessary part of how they can safely operate. So if you need to be able to keep a major part of your capital liquid, its not a great idea.
• Most real estate funds are structured to make money over time, which means some will not pay at all in the short-term.