Commercial real estate has become more mainstream in recent years. However, the high costs and time demands of owning income-generating properties can make it difficult for individuals to invest in this asset class. Real estate investment funds offer an alternative for those who want to invest in commercial real estate but prefer a hands-off approach. By pooling multiple real estate investments into a single fund, investors can diversify their portfolios and reduce risks.
There are three main types of real estate investment funds: sponsor funds, fund of funds, and customizable fund of funds.
1. Sponsor Fund
A highly appealing avenue for passive real estate investors is the Sponsor Fund, which offers a compelling proposition. By investing in a specific real estate sponsor or a company that shares similar values, investors can actively contribute to their growth and potentially reap the rewards of their achievements in real estate ventures. These funds present a distinctive opportunity to harmonize investment strategies with sponsors' specialized expertise and visionary outlook.
By opting to invest in a Sponsor Fund, real estate investors gain the advantage of harnessing the experience and proven track record of accomplished sponsors who possess an intimate understanding of the local real estate market. By entrusting their funds to these sponsors, investors can capitalize on their astute ability to identify lucrative investment prospects, efficiently manage properties, and optimize returns.
Pros:
Access to experienced sponsors with proven track records
Potential for consistent returns
Potential to participate in deals that are not available outside of the fund
Risks spread over multiple properties
Cons:
Higher risk than other types of funds
Completely reliant on a single deal sponsor
Completely reliant on sponsors choice of market(s) and properties
No control over investment decisions
Reliant on Sponsor to bring in new opportunities.
2. Fund of Funds
The Fund of Fund is a type of investment fund that allocates capital to different deal operators and their real estate investments. This strategy allows passive investors to gain exposure to a diversified portfolio managed by multiple operators across various sectors and strategies. By spreading real estate investments across different operators and sectors, the Fund of Funds aims to reduce risk and increase the potential for consistent returns. This diversification strategy helps mitigate the impact of underperforming assets or markets. It allows investors to benefit from the expertise of multiple operators and take advantage of diverse opportunities in the real estate market.
Pros:
Diversification across multiple operators
Risks spread over multiple properties
Potential for consistent returns
Ability to have broad or narrow investment profile
Fund manager representation with the deal sponsor
Cons:
No control over investment decisions
Limited by broad or narrow investment profile
Completely reliant on Fund Managers choice of Deal Sponsors
Completely reliant on Fund Managers choice market(s) and properties
Reliant on Fund Manager to bring in new opportunities
3. Customizable Fund of Funds
The Customizable Fund of Funds is an attractive option for passive investors seeking increased flexibility and control in their real estate investments. This fund type offers a tailored approach, allowing investors to construct a personalized investment portfolio by selecting from various real estate sectors, including RV Parks, commercial real estate, multifamily properties, self-storage facilities, short-term rentals, and more.
By utilizing the Customizable Fund of Funds, investors can achieve maximum diversification while aligning their investments with their specific preferences and risk tolerance. This unique feature enables investors to handpick sectors or asset classes that resonate with their investment goals, creating a portfolio that captures diverse return profiles, mitigates risk, and seizes opportunities within their preferred real estate market segments.
Pros:
Maximum self diversification
Risks spread over multiple properties, locations, sponsors, types
Potential for consistent returns
Ability to align with specific preferences and risk tolerance
Increased flexibility and control
Ability to have broad investment profile
Access to experienced sponsors with proven track records in specific asset types
Potential for consistent returns
Potential to participate in deals that are not available outside of the fund
Fund manager representation with the deal sponsor
Cons:
Additional uncommitted funds needed for each new opportunity if investment is chosen
Reliant on Fund Manager to bring in new opportunities
Reliant on Fund Managers choice of Deal Sponsors. (investor has opt in/out Choice)
Reliant on Fund Managers choice market(s) and properties. (investor has opt in/out Choice)
To Wrap Things Up!
Venturing into real estate investment funds not only unlocks opportunities that would otherwise remain beyond reach but also connects you with accomplished sponsors. Furthermore, such real estate investments contribute to the diversification of portfolios and alignment with individual preferences.
So, whether you are interested in learning more about these fund types or want to discuss specific real estate investment opportunities, feel free to message us for further guidance. Together, we can discuss how real estate investment funds can benefit your portfolio and align with your long-term financial goals.