TOP 6 REASONS TO INVEST IN A FUND
The benefits of investing in real estate are numerous. With well-chosen assets, investors can enjoy predictable cash flow, excellent returns, tax advantages, and diversification—and it's possible to leverage real estate to build wealth.
But along with the benefits of real estate ownership come asset and property management responsibilities. These can range from keeping up with day-to-day operations and maintenance to strategic improvements to the property. Most investors don’t have the time or, more importantly, experience to make this type of commitment.
One solution is investing in a real estate fund. Putting money into this type of financial instrument can provide the benefits and returns of real estate ownership without the direct responsibility of owning and operating a property. A real estate fund is a great way to generate passive income for those who are interested in owning real estate, but who do not want the responsibilities of direct ownership.
Below are the top 6 reasons why real estate investors should seriously consider adding Fund investments to their portfolio
Flexibility
It is a common misconception that investing in a real estate fund requires an investor to sacrifice flexibility. In fact, the opposite is true. If you were to invest in a single asset, for example, you’ve put all your eggs in that basket – you’d better hope that the investment pays off the way you expected it to! However, investing in funds provides more control and flexibility as you can invest as much or as little as you'd like (subject to Fund minimums).
Profitability
Real estate investment funds are generally structured to return profits to investors before any profit is earned by the fund’s partners. As a result, the partner is highly motivated to ensure the deal achieves its intended profit threshold. Funds are structured in this way as a means of keeping interests aligned between the partners and their investors.
Diversification
Funds can set a wide variety of investment parameters, broadening the reach of potential investments. For example, a fund may focus specifically on a single asset type but be open to different geographies. Alternatively, a fund might invest in a range of product types in a single market.
By investing in a real estate fund, individuals can diversify their portfolios, thereby mitigating the risk of having “all eggs in one basket.” This is one-way investors protect themselves in the event of an economic downturn or unforeseen circumstance.
Absolute Returns
The absolute returns of a fund refer to the amount of profit the fund has earned. The absolute returns include any additional returns above and beyond the preferred return. Funds that perform exceptionally well will provide absolute returns significantly higher than the anticipated preferred return.
Correlation to other Asset Classes
Real estate, in general, has a low correlation to other asset classes such as stocks and bonds. This is because of the highly illiquid nature of real estate, which cannot be purchased and sold on a moment’s notice. As such, many people will opt to invest in real estate investment funds as a way to diversify and protect their holdings.
Unlike the stock market, which would immediately lose tremendous value, real estate portfolios tend to continue marching on. Rents continue to be paid and profits returned to investors. While the real estate portfolio may eventually take a hit, there is not the same correlation to other asset classes which can experience more drastic, momentary ebbs and flows.
Qualifications
When investing in real estate funds, individual investors benefit from the experience and qualifications of the fund partners. The partners are typically highly qualified to oversee a fund that will be deployed in various real estate projects. A high quality partner team will be able to provide detailed financials for investors’ review, and will be happy to answer any questions about their strategy, assumptions, and how and why the fund structure they are building will prove to be successful.
Moreover, the fund manager(s) oversees all day-to-day activities associated with the fund. This allows individuals to invest without being distracted by the nuances of each individual transaction carried out through the fund.
Generally, funds can provide rates of return at a lower risk than individual property investment. However, due diligence into the fund's purpose, assets and sponsorship is essential to ensure that the investor reaches his or her financial goals.
