Everybody knows about real estate investment funds, but fewer than 1% truly understand the workings—the ins and outs—of this popular investment vehicle.

However, if you’re planning to invest in real estate using a fund, you need to understand the structure of this type of investment. 

What is a Real Estate Investment Fund?

A real estate investment fund is a type of investment vehicle that pools money from multiple investors to purchase and manage a portfolio of properties. These funds can be structured in various ways, but they typically involve a group of investors contributing capital to a fund manager who then uses that money to invest in real estate assets.

Real estate investment funds can be publicly traded or privately held, and they can focus on a specific type of property (such as commercial or residential) or a particular geographic location. These funds can also vary in size, with some targeting smaller, individual investors and others catering to high-net-worth individuals and institutions.

Types of Real Estate Investment Funds

There are several types of real estate investment funds, each with its own unique structure and investment strategy. Some of the most common types include:

• REITs (Real Estate Investment Trusts): These are publicly traded funds that invest in a variety of real estate assets, including commercial properties, residential properties, and mortgages. REITs are required to distribute at least 90% of their taxable income to shareholders, making them a popular choice for investors seeking regular income.
• Private Equity Funds: These funds are typically only available to accredited investors and institutions and focus on larger, more complex real estate deals. Private equity funds often have a longer investment horizon and may require investors to commit their capital for a set period.
• Hedge Funds: Hedge funds are similar to private equity funds in that they are only available to accredited investors and institutions. However, they tend to be more actively managed and may use leverage to increase returns.
• Real Estate Crowdfunding: This type of fund allows individual investors to pool their money together to invest in real estate projects. Crowdfunding platforms typically offer a variety of investment opportunities, from single-family homes to large commercial developments.

Real Estate Fund Structure

The structure of a real estate investment fund can vary depending on the type of fund and its investment strategy. However, most funds follow a similar structure, with a few key players involved in the management and operation of the fund.

Fund Manager

The fund manager is responsible for overseeing the day-to-day operations of the fund, including identifying and acquiring properties, managing the fund’s assets, and distributing profits to investors. The fund manager may also be responsible for raising capital from investors and making investment decisions on behalf of the fund.

General Partner

In some real estate funds, the fund manager may also serve as the general partner. The general partner is typically responsible for managing the fund’s assets and making investment decisions. They may also be required to contribute a portion of their own capital to the fund.

Limited Partners

Limited partners are the investors who contribute capital to the fund. They have limited liability and are not involved in the day-to-day management of the fund. Limited partners typically receive a share of the fund’s profits in proportion to their investment.

Advisory Board

Some real estate funds may also have an advisory board made up of industry experts who provide guidance and advice to the fund manager. The advisory board may also be responsible for reviewing and approving investment decisions.

How Real Estate Funds Make Money

Real estate funds generate income in several ways, including:

• Rental Income: If the fund owns rental properties, it will receive regular income from tenants in the form of rent.
• Capital Appreciation: As the value of the fund’s properties increases, the fund’s assets also appreciate, allowing the fund to sell the properties for a profit.
• Interest Income: If the fund invests in mortgages, it will receive interest payments from borrowers.
• Fees: Real estate funds may charge various fees to investors, such as management fees, performance fees, and acquisition fees.

Advantages of Real Estate Funds

Real estate funds offer several advantages to investors, including:

• Diversification: By investing in a fund, investors can spread their risk across a portfolio of properties, reducing their exposure to any one asset.
• Professional Management: Real estate funds are managed by experienced professionals who have the knowledge and expertise to make sound investment decisions.
• Access to Larger Deals: Real estate funds can invest in larger, more complex deals that may not be available to individual investors.
• Passive Income: Many real estate funds generate regular income in the form of rent, providing investors with a steady stream of passive income.

Risks of Real Estate Funds

While real estate funds offer many benefits, they also come with some risks, including:

• Lack of Liquidity: Unlike publicly traded stocks, real estate funds are not easily bought and sold. Investors may have to wait for a specific period or meet certain requirements to withdraw their capital.
• Market Risk: Real estate markets can be volatile, and the value of a fund’s assets may fluctuate, potentially resulting in losses for investors.
• Fees: Real estate funds often charge various fees, which can eat into investors’ returns.