My partner and I have been investing in real estate, for ourselves and for others, for over 15 years. In that past, we created private placement memorandums for individual projects and/or properties and paid the returns created by those investments. In addition to being extremely labor intensive, we found that this method severely limited our ability to move quickly on prime investments. After attending a seminar on mortgage pools, we decided that a real estate pool or fund was a more dynamic business strategy, particularly when faced with ever decreasing timeframes for acting on hot properties. The primary purpose of a real estate investment fund is to pool resources to increase the fund’s buying power and leverage over that of a single investing entity. Real estate investment funds have significant advantages over individual real estate investing for both the investor and the manager. Four of the primary benefits are outlined below.
1) Ease of Doing Business – From the investor’s perspective, the investor simply completes a subscription agreement, becomes a member of an LLC, and contributes an initial investment (usually a minimum of $25,000 per fund). At that point, the manager takes over. The investor no longer has to scour the market looking for potential investments. The investor must only decide whether to receive distributions paid by the fund or to re-invest his earnings back into the fund.
From the manager’s perspective, the manager is free to HULT PRIVATE CAPITAL target properties or projects that require quick turnaround decisions and expeditious underwriting. That power is derived from the scope of the investor’s consent contained within the subscription agreement.
2) Decreased Investment Risk – As an individual investor, 100% of your money is potentially at risk with each and every investment. When the investor invests in a pool, however, the individual investor is sharing both risk and reward scenarios with other investors. Additionally, the investor will have diversity in inventory. A competent manager looks across different profit centers to ensure that there is an ebb and flow of low to moderate risk investments throughout the fund. In today’s market, there is no need to undertake high risk investments-there are simply too many good deals out there to require any manager to take unnecessary risks. Targeting 15%+ returns in today’s market is not only realistic, but is a very achievable goal.
3) Fixed Returns on Investments – Although no investment can guarantee returns, a real estate fund can provide the investor with an annual fiscal compass. Most funds will not stipulate to a projected return without having ample confidence that it will meet its targeted goal. Real estate funds today average an annual payout between 9 and 13%. Such averages can provide stability in the mind of the investor, similar to the stability provided by a regular paycheck. Real estate investment funds can provide annualized fixed rates of return investors can bank on.
In most cases, managers pocket the arbitrage above and beyond the targeted return. As such, the manager obviously is motivated to not only meet, but to exceed the targeted return. (Personally, I believe managers should split profits above the targeted return, but this is not the industry-accepted norm.) For example, if a particular fund is targeting 12% returns for its investors and the fund returns 18%, the fund’s manager retains 6% while the investors are paid out 12%. Everybody is a winner. If a deal is win/win, then many more deals will come. Another positive effect of meeting a targeted return goal is that confidence grows for the fund’s management team. This confidence usually results in referrals and thus more capital to be poured into the existing fund or a new one.
4) Higher Returns With Less Hassle – People are busy, and have their own business and personal obligations. Investing the right way can be a full time job. In the fund, the manager does the legwork for the investor. Any solution that promises double the returns of t-bills, bonds, cds, and most municipals and still remains relatively liquid is an attractive alternative in today’s market. Although no investment is bulletproof, real estate investing offers tangible and legal protection for your money. Real property is a much different asset than paper. If a business fails and you own its stock, you have little to no collateral to fall back on. A house, an apartment building, an office or a piece of land are all tangible assets that protect against potential losses. Investing in the fund wraps up all the benefits of investing in real estate while maximizing returns and minimizing effort on the part of the investor.
Although there are other benefits for both investors and managers in a real estate investment fund, these are the four primary advantages. In today’s market, there are other investment vehicles, but few can offer what a real estate fund can. Real estate investing is the most riveting and fluid industry in the world. Take a look at a real estate fund the next time you are looking to invest.
Eric Lynn is the fund manager for Investment Funding Group, LLC, a real estate investment fund for people that are seeking above average returns via first lien positions in distressed real estate. Currently paying out 15% annual returns + a percentage of any upside. His fund’s primary geographic focus is in Nevada, California, Arizona, Texas and Ohio.