Commercial real estate, formerly deemed an alternative investment, has become more conventional and mainstream. Most people are limited to procuring small commercial or small multifamily properties considering the high costs related to having income-property. Real estate investment funds allow an additional entry point for individuals that looks for commercial real estate investment without worrying about regular management activities.
A sponsor basically leads a real estate investment fund with years or even decades of experience in the industry of real estate. The fund manager will cautiously examine every individual opportunity and execute them using the fund’s capital. These funds may be structured in several ways. Some are open to the public while others are only acquirable to accredited investors. The majority of real estate investment is considered closed-end funds which aim for their investor’s risk-adjusted passive returns.
Real Estate Funds Benefits
Investment funds are normally systematized to return profits to the investors before the fund’s sponsor earns any profit. As a result, the fund’s sponsor is particularly motivated to guarantee that the deal gains the planned profit threshold. They are structured this way as a method of keeping regulated interests between their investors and the sponsor.
Sacrificing the investors’ flexibility in a real estate fund investment is a prevalent misconception. In fact, the contrary is true. Fund investment provides more flexibility and control. There are several funds fixated on different asset classes and geographies that grant the investors to select which property types they want to buy and where. With these, investors can personalize their portfolio excluding the need to directly buy individual assets.
Funds can lay a wide variation of investment parameters, expanding the scope of potential investments. For instance, a fund may specifically concentrate on a single asset type yet remains open to contrasting geographies. On the other hand, a fund can perhaps invest in a variety of product types in an exclusive market. Some other funds will perhaps only finance in opportunistic real estate investment which requires moderate rehab to heavy rehab on a mid-term to long-term time horizon. Other funds have a few investment parameters. Investors can mitigate the probability of experiencing “all eggs in one basket” and they can vary their portfolio by having a real estate fund investment. This is also another way of self-protection for the investors in case of an economic downturn.
Real estate fund investment has numerous benefits. Many funds are formed to last longer than a year, hence unless within the year one of the assets of the fund is sold, it will not be taxed at the rate of short-term capital gains instead it will be assessed at the rate of long-term capital gains. Additionally, real estate fund investors can profit from the pass-through depreciation.