What Are Private Real Estate Investment Funds?
Real estate has long been an appealing investment, but people often think it involves becoming a landlord or flipping properties. While those endeavors certainly have the potential to pay off, they’re not the only forms of investing in real estate. Private real estate investment funds offer another way to make money in the real estate game without having to take a hands-on approach to property management or ownership.
Private Real Estate Funds Defined
Private real estate funds gained popularity during the 1990s as property values fell, giving investors new opportunities to acquire real estate without the hands-on management required of traditional ownership. The term is used to describe a class of assets that include pooled investments in both private and public properties. Investors pay money into the fund to build equity for it and so that money can be invested into real estate on an ongoing basis.
These investments are professionally managed and operate similarly to mutual funds because they invest in securities — in this case, real estate properties. Private real estate investment funds allow people to access some of the financial benefits of owning different types of real estate without needing to qualify for financing, too.
This isn't a type of investment that's suitable for everyone. For starters, it carries a higher level of risk, and there's minimal liquidity. Investors (and their funds) are usually required to remain committed for several years; there may be lock-up periods that can last 12 years or longer, during which you can’t sell your share of the fund. Additionally, investors are required to provide a large commitment of upfront capital, with ongoing investments required over time. An initial investment could be a minimum of $250,000 or more.
When you're talking about investments, the potential returns likely pique your interest. Although private real estate investment funds require long-term strategy and considerable capital investment, they're also well-known for their potential to yield high returns. Average annual returns from 6% to 10% are relatively common, but even higher returns are possible.
Benefits of Investing in Private Real Estate Funds
Investing in private real estate funds allows you to diversify without having to manage properties and rentals or flip houses. Instead, you reap the rewards of working with experienced fund managers and professionals who are focused on and established in the practice. The cash flowing into private equity real estate typically means there’s a sustainable, predictable fee structure. All the fees and costs are spelled out clearly in the contract, which means that there may be fewer surprises when it comes to expenses when compared to other types of real estate investments.
The capital required for periodic investment is only asked of you once the fund managers find property that meets the fund’s needs or requirements. It's a long-term strategy, but it pays off with maximized growth potential. Additionally, it's notable that most private equity deals put investors first. Managers often only get paid after investors make money. There are also appealing tax benefits, such as deductions and pass-through depreciation opportunities.
REIT vs. Real Estate Fund
There are many strategies for investing in real estate. Other than buying or flipping properties, two of the most common are private real estate investment funds and real estate investment trusts (REITs). Understanding the differences between the two can help you as an investor choose the option that best meets your expectations and financial goals.
A REIT is a company that owns or finances real estate by investing in income-producing properties, such as commercial buildings that are leased out, and other types of real estate. You can buy a share of a REIT portfolio, similarly to how you purchase stocks. Like stocks, REIT shares pay dividends to you instead of appreciating like private real estate investment funds do.
There are three main types, including equity REITs, which own and operate real estate that produces income. Mortgage REITs provide lending through loans and mortgages. Hybrids do a little of both. In general, REITs are better suited for investors who are looking for short-term profits or passive income from dividends. Private real estate investment funds are better choices for long-term investments.