What Is a Real Estate Fund?
With real estate being an extremely attractive and lucrative investment opportunity, it's an exciting time to be an investor. There are syndicates, REITS, and even crowd funding real estate opportunities for the informed investor.
While the property market has become more accessible and people are looking for ways to hedge against market volatility, it's also presented potential investors with a paradox of choice.
Which is a suitable investment to make? How do I choose which option is the right one for my circumstances and goals?
Today's blog will focus on one powerful investment strategy that offers steady returns, appreciation, and a low-risk option for accredited investors. We're talking about real estate funds. So, let's look at what a real estate fund involves and how it differs from other real estate investment strategies today.
The Components of a Real Estate Fund
A real estate fund is a single collection of various investments (assets). In terms of real estate, a fund can include one or more properties funded by a group of investors.
While an individual investor may buy a property to make money from rental income, a fund purchases assets over time with capital contributed by multiple investors.
For example, Viking Capital brings together multiple multifamily real estate investments (buildings that can house several residents or renters) funded by several investors, all contributing to the capital needed to purchase the properties.
In return, investors receive dividends (monthly payments) based on the performance of the assets plus profits from the sale of a property in the fund. Depending on the fund or strategy, investors can invest in one or more of the assets within the portfolio. The money returned is based on the original amount an investor puts into asset.
Let's take a look at a breakdown of the components contributing to a real estate fund and how they interact.
The fund refers to the money collected from the contributing investors. This money is then used to purchase assets that appreciate and provide value back to the investors and fund managers.
Fund investors are the individuals that provide capital to purchase assets. Investors in a fund can expect a return on their investment in the form of monthly dividends (payments) from real estate and upon selling any assets within the fund. The details of those payouts depend on preset terms and can vary by funds or assets.
Investors can choose the assets they invest in and the capital they provide. However, it is common for funds to have a minimum investment amount. For instance, an investor may have to be an accredited investor before contributing to a fund or multifamily property managed by a fund.
The fund managers are responsible for everything from securing the funding to purchasing and managing the property. They are essentially in control of the fund once the capital amount has been reached and are tasked with increasing value for investors.
An asset is a resource with financial value. Concerning multifamily real estate investing, the assets refer to the buildings purchased with the money from the fund. If you invest in multifamily real estate, you are investing in assets chosen by the fund managers.
Dividends are payments made to the investors from profits from the assets, such as rental income or the profit from the sale of an asset that has appreciated. If it helps, you can think of a fund as crowdfunding real estate with the potential for substantial payouts in a low-risk investment.
How Is a Fund Different From a Real Estate Investment Trust?
Although different investment opportunities may share similarities, a fund differs from a Real Estate Investment Trust (REIT). Understanding the differences can help you make an informed decision on how you choose to build more generational wealth!
A REIT is a corporation that invests directly in income-producing properties offering investors the opportunity to become shareholders in the company. For example, REITs often invest in office buildings rented to businesses.
In this sense, a REIT is more like investing in a stock, and many REITs are publicly traded companies. Because of this, REIT investors can realize profits from price fluctuations similar to the stock market. This is known as the buy low, sell high philosophy, which underpins the majority of market movements.
In addition, REITs must pay 90% of their taxable income to the investors. However, this makes a REIT much more susceptible to adverse market conditions as timing is more significant. If the market can jump up quickly, it can also jump down quickly.
A REIT may also invest in various assets in different classifications, whereas a fund generally makes investments within set parameters. This includes a time limit set on a fund, making it a longer-term and comprehensive risk-friendly strategy.
For example, Viking Capital invests in Class A and B properties within the Sunbelt region that show strong demographics and potential over five years.
Are REITs a Good Idea for Real Estate Investors?
It depends on what you want out of your investments. A REIT is a far more liquid investment, meaning investors can get their money out in the short term, much like selling off stock. However, if you're looking for bigger payouts and a long-term strategy, real estate investment trusts might not be ideal for your goals.
In addition, an investor in a REIT will not benefit from appreciation in the same way an investor in a fund sees these benefits. Whereas investors in a fund also have the opportunity to earn dividends from what's known as a preferred return, much like a REIT.
Why Should Accredited Investors Choose a Fund Instead of an Investment Trust?
While both investment opportunities offer access to a diversified portfolio of real estate, and many investors may choose both strategies to maintain a diversified portfolio, there are benefits to investing in funds that outweigh those of an investment in a REIT.
A real estate fund will pay out more significantly at the end of the fund's life while also providing passive income through monthly payments during the timeline.
A real estate fund offers greater stability with minimized risk and can help investors create generational wealth. As time passes, investors are building equity in the assets within the fund—while in a REIT, there is limited scope for growth.
Now Is The Time for Accredited Investors To Choose a Real Estate Fund
While everybody's circumstances are different, it doesn't get much better than real estate funds concerning appreciation, security, and securing long-term generational wealth.
Understanding how a real estate fund functions will bring you closer to realizing the financial freedom and generational wealth you've dreamed of for your family. If you're ready to go deeper or learn more about how an accredited investor can earn passive income and build generational wealth, reach out to Viking Capital today!
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