Short guides for operations that can be done in Covercy GP. These posts are linked from inside different palces across the app.

learn about the benefits of CRE banking through Covercy

How to Simplify CRE Banking Across Assets and Accounts

The More You Grow, The Harder Banking Becomes

As a GP for a commercial real estate investment firm, you know how complex and time-consuming it can be to manage CRE banking for your assets. On average, the typical GP has anywhere from three to four accounts per asset and anywhere from 10 to 20 assets. Even on the low end, that’s 30 separate bank accounts that you or your team have to manage. And when your transactions — investor distributions, capital calls, and vendor payouts — pick up, that administrative hassle only gets heavier. But the challenges don’t end there, unfortunately.

Even if you already have these accounts established (or have a process for establishing and managing them), it can be difficult to understand the financial performance of a single asset or account at any given time. This is because of the sub-accounts that can be connected to an asset. You might have separate CRE banking accounts for capital expenditures, operations, legal needs, marketing, investor management, fundraising, and other functions. Each time you have a new deal, you’ll have to open more of these accounts.

But the key challenge today is the technology solutions that CRE GPs use don’t streamline this process. Indeed, most don’t offer a CRE banking solution whatsoever. This means you’re left to manage this tedious process — account creation, ongoing account management, and pulling financial data — manually or with a separate solution. More than ever, you need a solution for real estate investment management that streamlines not only managing properties and investors but also CRE banking elements.

At Covercy, we’re committed to creating the solutions GPs need in a single platform. Our technology is the first solution that combines investor management, fundraising, and automated payments while adding a seamless banking component — further maximizing what you and your team are able to tackle in one technology platform. Let’s explore some of the benefits of our CRE banking capabilities and how they benefit you.

Beyond banking: See how only Covercy automates and streamlines investor distributions.

CRE Banking Advantages That Only Covercy Provides

Banking Accounts — Covercy has partnered with Choice Financial Group to provide full-service banking services. Within the Covercy software platform, you can open accounts under your fund or asset names to automate the processing of capital calls, distributions, and vendor payments. These accounts are completely secure (FDIC/FFIEC insured, U.S. only). Because these accounts are opened for you and managed under one platform, you’ll have complete visibility over and into the financial details of all of your assets on a single platform. Whenever you do a capital call, those funds are deposited directly into your accounts. Covercy also integrates with other accounts, ensuring that we’re simplifying your existing workflow — not further complicating it.

Hierarchical Organization — As we mentioned above, most GPs have anywhere from 3-4 accounts per asset. Navigating these is challenging, especially if those accounts are with separate institutions. With Covercy, you get a complete hierarchical view of all of your accounts, starting at the organizational level. From there, you can drill down into specific assets to view a total balance for that asset as well as drill down into asset sub-accounts to check the account balances for operations, expenses, vendors, and more.

Cross-Account Transaction Tracking — For each asset under your management, you’ll be able to view all transactions starting with the most recent. The account tied to the transaction, the type of transaction (contribution, distribution, rent, operations payment, renovation, and more), who the applicable recipient was, and the amount. All transactional information is sortable and filterable to help you quickly find the information you need.

Helpful Breakdowns — Asset-level banking dashboards provide you with a number of different financial data points such as a liquidity projection using transactional and reporting data, as well as monthly payment breakdowns and your largest investors.

Asset Sub-Account Types — Informative overviews are available for different account types, such as CapEx accounts (where you can view the progress of renovations and the impact of those renovations on rent collection) and asset management (where you can view capital call commitments and contributions, distribution information, and vendor payments). Easily filter and analyze data as needed to understand how your assets are performing over time.

Vendor Payments — We’ve already mentioned this a few times, but issuing payments to your vendors through our accounts is fast and simple. Whether it’s a payment for renovation work, accounting services, legal support, property managers, or any other need, you can pay your vendors and log those transactions in the system. Whenever needed, you’ll be able to filter and sort those transactions to understand where you’re at with any vendor and how those payments impact the asset as a whole.

In-Depth Reporting — Understanding how your assets are performing and the activity of your investors is important to making the most informed decisions possible. With our CRE banking features, you can look deeper into how investors are contributing to individual or multiple deals — allowing you to understand who your most active investors are and dedicate future fundraising efforts toward those investors in the future.

Go deeper: Explore the full capabilities of Covercy here.

Experience the Best in CRE Banking with Covercy

No other real estate investment management software offers the level of flexibility and capability that Covercy does. With more and more GPs signing up to streamline their processes, automate investor distributions, conduct more efficient and intelligent fundraising, and more, there’s never been a better time for your CRE firm to do the same. Skip the administrative hassles and time-consuming practices that have prevented you from dedicating more time to building relationships with investors and managing properties. Put Covercy to work for your firm today.

Start a Free Trial | Sign Up Now | Talk to Sales

Covercy is not a bank. Banking provided by Choice Financial Group; Member FDIC.

distributions of payments

Three Advantages of Fund Distribution Automation Software

With Greater Success Comes Greater Complexity

We’re sure the headline piqued your interest because you — just like many other commercial real estate GPs — are likely managing the distribution process manually. Even if you’re already using a technology solution to prepare and manage distributions, it’s likely you’re taking the funds across the finish line yourself — either by setting up an ACH transaction, contacting your bank to wire the funds, or even sending (or dropping off!) checks.

This process gets more complex when a property has a variety of investors with varying levels of investment. As the property begins to succeed and generate more revenue, you’ll need to provide returns to your investors. Depending on the number of investors a property has, calculating these can be an extremely time-consuming and manual process. And, if the property has a waterfall structure tied to it, that complexity only increases more.

Additionally, if your investment structure has a GP promote component built into it, you’ll need to build that into the calculation as well to ensure you’re compensated for your efforts in managing the fund and property itself. The icing on the cake is that you’re likely having to deal with this for every property under your management. Even handling distributions quarterly means this is a significant undertaking, either on your part or that of your team.

Clearly, there’s never been a more important time to consider a solution for fund distribution automation. Here, we’ll explore a few advantages that such a platform provides.

3 Benefits of Fund Distribution Automation Software

1. You Can Factor Pro-Rata Ownership into Your Distributions

Investors participating in a deal are all doing so at different levels. While you’ll likely have some that have bought in at the minimum level, others will invest according to their own financial strategy. This means you have a number of different pro-rata calculations to consider when executing distributions. If you’re doing these manually, you’re likely spending a lot of time here. Manual work also creates unnecessary risk in that you or your team could make a mistake, which creates confusion and extra hassle to resolve.

Managing this is just another administrative component that takes your focus away from building stronger relationships, overseeing properties, and hunting for new deals. With Covercy, you can automatically calculate distributions based on each investor’s pro-rata ownership of the property or fund. When using our fund distribution automation platform, this further expedites what is already a streamlined distribution process and allows you to get back to doing what you do best.

Get to an ideal state: Learn what makes for the best CRE investor management solution.

2. GP Promote Allocations Can Be Included

You deserve to receive — and are likely incentivized with — compensation for managing the investment process, closing the deal, overseeing each property in your portfolio, and managing distributions to your investors. It’s time-consuming work, with or without fund distribution automation software to help streamline what is only a piece of a bigger responsibility. If your deals include a GP promote component, you can save time and effort by including those calculations in the automated quarterly distribution.

With Covercy, GP promote can be included in the above-mentioned pro-rata calculations. And, if your deals have a waterfall component attached to them, those calculations can be imported into the system and included in the distribution process as well. So if your compensation increases as the property does better and better, you’ll be able to quickly and efficiently receive your just earnings along with providing rapid distributions to investors in their preferred currency, whether domestic or international.

Explore more in distribution: Learn how Covercy excels with automated distributions.

3. Speed — and Value — Are Increased

In addition to simplifying your workload and allowing you more time to focus on your investors and properties, fund distribution automation allow you to deliver what your investors want, faster: their returns. Gone are the days when you and your team have to spend countless hours and days sifting through the calculations and spreadsheets mentioned above — now, you can import the data you need for an asset or fund (such as investor info, bank account information, pro-rata ownership, and more) into one system and execute distributions in a matter of clicks.

Investors receive a notification with the complete details of the distribution and, if you choose to include it, a personalized message from you. After selecting a gross distribution amount, you can also select tax withholding as well as indicate adjustments as needed. If your investors have multiple bank accounts, the system will automatically default to the most recent account used. Collectively, these features make Covercy the fastest, most efficient, and investor-focused platform available for CRE GPs.

That was easy: Learn six ways that Covercy simplifies distribution management.

Experience a New Approach to Fund Distribution Automation

Distributions are a critical part of your work as a GP. Your investors are everything, and ensuring they’re satisfied with their decisions and returns is of the utmost importance. Covercy’s automated distribution capabilities empower you to ensure exactly that, but they’re far from the only advantage the system offers:

  • Helps prevent phishing and fraud via enhanced security
  • Supports complex investment structures like private equity
  • Provides investors with an elegant, easy-to-use portal
  • Enables greater communications with investors
  • Allows GPs to prepare performance reports and share documents
  • Provides fundraising solutions and investor activity tracking
  • Allows for creation and management of capital calls

Experience a New Kind of Fund Distribution Automation Software

Start a Free Trial | Sign Up Now | Talk to Sales

explore what makes for the ideal real estate investor management software

Finding the Ideal Real Estate Investor Management Software

A Complex Market Requires a Streamlined, Effective Solution

Being a GP in today’s market is extremely complex — you have a firm to manage, a fund to grow, investor relationships to nurture, and of course, deals to make. All of this in itself is more than a full-time responsibility, even with a team supporting you. To add to this already heavy workload, the commercial real estate market is heating up.

Currently, more capital is available in the market for commercial real estate (CRE) investment than deal opportunities. This is not surprising considering the massive increase in interest in CRE throughout the pandemic. Based on research data reported in the Wall Street Journal, commercial real estate sales hit $809 billion last year — more than double the 2020 figure and well above the $600 billion sold in 2019. Investors turned their focus on warehouses due to the growth of eCommerce, apartment buildings as housing inventory fell and rents increased, and other property types.

This demand is not expected to slow down anytime soon, either. Demand is expected to increase by five to 10 percent in 2022 over 2021 according to the 2022 U.S. Real Estate Market Outlook by CBRE. As a GP, this presents an opportunity for growth as well as a challenge in obtaining deals and managing additional investors. If your aim is growth this year, it’s time to take a look at the tools you’ll use to support it — starting with your real estate investor management software.

What an Ideal Real Estate Investor Management Software Should Do for You

Currently, many CRE investors handle investor management manually — especially smaller firms that manage several deals per year and have a limited pool of investor relationships. But regardless of size, this inefficiency can cost you as a GP. When the next deal comes in, it’s critical that you get in front of your investors — whether it’s 20, 200, or 2,000 — as quickly as possible to present the opportunity. Keep in mind that CRE investors are more than likely on lists for other firms as well, so you’re always competing for their interest. So how can the ideal real estate investor management software help? Let’s dig in.

1. It Must Help You Streamline Investor Relations

With each property under your management, you and your team will have a good deal of work to oversee. You’ll need to go about managing the property, adding value where you can, communicating with investors over time, navigating any future issues that may arise, and managing distributions. Many GPs today still manage this work in spreadsheets, too — creating hassle and complexity that derails higher-value tasks. All of this work is incredibly time-consuming and inefficient — even if you have a team supporting you.

The right real estate investor management platform will provide the tools needed in a single platform to make managing investor relationships and activities much easier, efficient, trackable, and pleasant for all parties. It will allow you to manage capital calls, centralize resources as they come in, generate reports and documents, more effectively manage investor databases, and eliminate unnecessary manual file management.

Experience Covercy — A complete CRE investment management software solution providing everything GPs need to manage deals, investors, and more.

2. It Must Simplify Distributions to Your Investors

After a deal closes, providing best-in-class service to your investors will be critical. Distributions are one of the most important and often frustrating for GPs. You’re likely well aware of how frustrating wiring funds to your investors can be — in many firms, it’s forebodingly referred to  as “wire day.” If you’re already using a real estate investor management software, it might provide an ACH file, but you’ll still have to take care of the actual wiring process itself. Even if you’re handling this quarterly, it can still be frustrating.

A better solution would allow you to distribute payments to investors automatically — with pro-rata calculations based on each investors’ percentage of asset ownership and appropriate tax withholdings (by percentage or a fixed amount), either domestically or internationally and in the right currency. Investors should be notified when this process occurs and be able to view all of the financial information involved (as well as be able to update their bank account information at any time for future distributions).

The Covercy Difference — Unlike many of today’s solutions, our software platform provides everything needed to seamlessly manage investor distributions in a matter of clicks.

3. It Should Make Fundraising a Breeze

If you’re approaching fundraising at a high level, without evaluating the past investments and activity of your current investors, or identifying people who haven’t yet invested, you’re casting a wide net when the time comes to raise capital for your next opportunity. While deals can still be shared with your investor base en masse, being able to understand what your investors are interested in, their positions in current investments, and their overall activity in your communications will help you prioritize your fundraising efforts.

The ideal investor management software will not only give you the tools you need to announce and communicate your CRE opportunities but also to understand how investors are engaging with those elements. It should show you how often your investors are engaging, thereby giving you an understanding of which investors are most likely to act. Further, it should make the process of investing simple by streamlining contracts, payment processing, and more.

Evaluate Interest with Covercy — our CRE platform allows you to create webpages for properties, share them via email, track investor activity, and more.

Ready to Make Your Life — and Investors’ Lives — Easier? Experience Our Real Estate Investor Management Software

Covercy is an innovative, all-in-one real estate investor management software solution for today’s busy GPs. With a complete portfolio of features, advanced security, and more, our platform has helped many CRE firms and GPs redefine the way they manage deals and investor relationships. It can do the same for you.

Sign up for a free trial here, or connect with our team to learn more.

k1 tax forms

Everything You Need To Know About Schedule K-1s

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Everything You Need To Know About K1s

Running a fund brings with it many responsibilities, like choosing the right deals for your LPs, and making them enough money back on their risked capital. But it also means other financial and legal obligations, like handling some tax aspects for them. Schedule K-1 is one of them.

 

Here’s everything you need to know about K1s

What Is Schedule K-1?

You might’ve heard it being called by a similar name: IRS Schedule K, but they are indeed the same. However, this IRS tax form comes in two variations:

 

  1. Schedule K-1 (Form 1065), Partner’s Share of Income, deduction, credits, etc.

 

  1. Schedule K-1 (Form 1120S), Shareholder’s Share of Income, deductions, credits, etc.

 

  • A partnership reports transactions via Form 1065.

 

  • An S corporation reports activity via Form 1120S.

 

Usually, these are pass-through entities that aren’t required to pay corporate taxes themselves due to passing profits on to their investors, like your LPs. Both of these forms are federal tax documents issued annually, and they report the gains, losses, earnings, dividends, interest, and other distributions from certain investments or business entities for the previous tax year.

 

As a veteran GP, you know that Schedule K-1 is prepared for each individual partner and is included with the partner’s personal tax return, but It’s important you remember:

 

  • Your LPs will use Schedule K-1 to report their earnings, losses, and dividends.

 

  • Your LPs will expect you to use Schedule K-1 to track each LPs share/ownership in your fund.

 

  • Schedule K1s are often issued by pass-through businesses or financial entities which don’t directly pay corporate tax on their income. Instead, they shift the tax liability to their stakeholders or partners. This is what your fund will do.

 

Understanding Schedule K-1

The U.S. federal tax code allows the use of a certain strategy called “pass-through”. This strategy, in certain cases, lets a trust or a partnership shift its tax liability to the (often many) individuals of interest participating in it.

 

In such a scenario, the entity itself, let’s say, your fund, pays no taxes on its earnings or income.

Instead, any payouts, along with any tax due on them, are “passed-through” directly to your LPs.

 

And this is where Schedule K-1 comes in.

 

Its purpose is to report each participant’s (LPs) share of the business entity’s (fund) gains, losses, deductions, credits, and other distributions (even if you didn’t actually distribute them).

 

Note: K1s are not filed with each LPs tax return, but the financial information posted to each LPs K1 is sent to the IRS using Form 1065. Basically, RELPs (real estate limited partnerships) don’t pay taxes directly. Instead, their net losses/gains are pass-through income to each partner.

 

As you know, your LPs are able to enjoy tax benefits as if they were investing in CRE on their own. Things like depreciation and interest expense can be deducted to reduce each partner’s tax liability, and use 1031 exchanges for similar property buy-outs in order to defer their capital gains.

 

However, remember that your LPs aren’t able to exchange their partnership interest, meaning—your LPs will have to pay capital gains tax if your partnership with them dissolves—even if they wish to reinvest the capital.

 

Important:

In your partnership with your LPs, they are only liable for the debts and obligations based on the amount of capital they contributed (risked), while also taking into consideration the partnership agreement (contract) signed (how the partners split profits)—which impacts the info on their K1s.

What is distribution income in K1?

It’s important to note that while a K1 shows the reportable results concerning your fund’s earnings, it doesn’t mean you’re obligated to pay out each LP the amount of earnings listed. For example, your fund may choose to retain earnings in the business; for reinvesting purposes, for example, and pay less to investors and owners—as long as it’s agreed upon in your initial contracts.

 

How general partnerships file K1s

As mentioned, in general, partnerships by themselves aren’t liable for taxes on income generated by the business. Instead, each of your LPs is subject to income taxes based on their ownership percentage in your fund.

 

When you’ll file 1065s to the IRS outlining your fund’s finances, you must also prepare a K1 for each LP to reflect their share of any profits/losses/distributions from the business. When your LPs receive their K1s, they’ll include the information on their personal tax return for the year.

 

So, for example, if your fund generated $250,000 of taxable income in a year, and your LP owns 50% of the fund, you’ll generate a K1 for them lining a $125,000 share of that income. The amount of tax they owe will be based on their overall federal income tax bracket for the year.

What to know about the Capital Account section of the K-1 form

The Capital Account section of the Schedule K-1 reports changes to your investor’s (LPs) capital/equity in your fund, including capital contributions and allocation of net income or loss, among other things.

 

What confuses most GPs is the tax basis box, and it’s designed to differentiate which capital method is being reported.

 

If they don’t check the tax basis box, they’ll need to track their tax capital separately each year.

 

If they do check the tax basis box, the LPs Schedule K-1 is reported on a tax basis, and the K1 reported amount is added to the liability allocations to calculate the overall tax basis in their investment.

When is Schedule K-1 due?

When it comes to K1s, your duty to your LPs is to prepare them and make sure they’re received no later than March 15th (or the third month following the end of the fiscal year). These forms are notoriously late and are prone to cause issues—with March 15th being so close to the tax filing deadline (April 18th). If you’re going to be late in providing your LPs with their K1s, make sure they know in advance, and suggest they file for a tax extension. If your LPs file their taxes without their K1s, they’ll have to amend it and refile. Help them by preparing their K1s on time.

 

Note: if your LP files for a tax extension, it’ll only delay their filing, not them having to pay taxes they might owe).

 

 

Your investors chose you and your fund for many reasons, but all investors like peace of mind, especially when it comes to taxes. Today, by educating yourself on what are K1s, understanding them, learning who files them, when they’re due, and your obligations on the matter, you gained paramount knowledge on how to help your LPs maintain/gain that peace of mind.

 

*Disclaimer

Investing in commercial real estate can be risky. It is not a fit for everyone. While we aim to provide general information to help you better understand CRE investments, we are neither providing any investment advice nor advising for or against any particular investment.

investor relations

What A Great General Partner Should Know About Investor Relations

Effectively managing your Limited Partner relationships is essential to your success. But as a GP, you’re perpetually juggling calls, emails, and meetings, so finding time to update your investors on your progress can often be challenging. Unfortunately, not every firm has the luxury of a dedicated investor relations team, especially if you’re just starting out.

Luckily, we have some tips about why it’s so important to have great relationships with your LPs, your role in that relationship, and specific points to help you maintain it.

 

Related Webinar: Seven Ways to Make Sure your LPs Reinvest in Your Next Deal

Why is a good investor relationship critical for your fund?

While inspiring to become as attractive as KKR or Blackstone, you and other smaller GPs and fund managers might encounter problems trying to forge new relationships and raise capital.

During long-term CRE investing, relationships between you and your LPs can (and should) last many years, even as roles and firms change. Therefore, treat your relationship as long-term ones, finding ways to consistently harness and nurture your investors (relationships), especially in a digital world. It can be your key differentiator.

When you learn to structure your regular LP updates and treat these network connections as your long-lasting relationships, it will support your reputation and future fundraising efforts.

Your role and responsibilities of a General Partner

As the general partner of a fund, you’ll raise, allocate investor capital and, and analyze potential deals. You’ll be held responsible for the outcomes, as you’ll be the one making the final decisions on where the fund’s resource pool will be dispersed, and when.

You will get compensated via management fees, carried interest, and capital distributed back from the fund’s deals. Essentially, your responsibilities are many, but they all revolve around nurturing your LP relationships.

Here’s how you do it while perfecting your responsibilities.

How to build and manage relationships with your investors?

Set clear expectations early on

Being synced with your investors, making sure you’re on the same frequency, or the same page is crucial. It’ll help you avoid dealing with confused money looking to pool out too early, and unwarranted bad reviews due to it. Make sure you clearly communicate your vision, investing methodology, scale and growth plans, and exit strategy. Setting these expectations can save disappointment and frustrations for both sides later on.

Show conviction

When a LP puts his money in your hands, he’s investing in your fund, but he’s mainly investing in you. He chose your return rates, but also your character, vision, and ideas. You are looking for strong LPs. Strong LPs will choose a strong GP. Nothing scares a LP more than a GP who’s constantly seeking direction and reassurance. Show conviction. Always.

Listen actively to concerns

Your investors want you to succeed, both because their money is on the line, but also because if they chose to work with you – they respect you. Show them respect back by actively listening to their concerns and by encouraging open, clear dialogue. This will help you learn about the risks they’re willing to take, and those they deem futile.

Strategize how you’ll add value

Many GPs can make good ROI for their LPs, but few can get great ROI and add extra value. And while every investor loves money, they value relationships more, as networking in real estate can win you deals. Your LPs know other LPs. If you go the extra mile for them, they’ll help you get your financing done, introduce you to their network – and by doing so, helping you build brand reputation organically.

Consider hiring a professional mediator.

Your LPs will come from diverse backgrounds. They’ll be from different countries and states, might hold different political views, and originate from different cultures. This might cause communication hurdles, and when things don’t go as planned, a professional can help. To maintain relationships, and avoid creating a bad name for yourself, avoid litigation against your LPs, even if things go south. Try hiring a mediator first, or an arbitrator as a last resort.

Communicate wins and challenges frequently.

In business, uncertainty creates hostility; hostility creates conflict; and conflicts results in delays, trouble, and losses. Communication is the most important factor in any relationship, especially in new business partnerships—where doubt is prevalent, and trust is hard to build.

But the truth is, most investors don’t want to know everything going on in your office. So, consolidate your update to a few relevant highlights and lowlights.

Highlights can include a few wins, like new partnerships, exciting deals or noteworthy new customers, recent major deals closed, or key leadership changes. Also, if poor portfolio performance or disappointing exits occur, put that in your lowlights report as well, as transparency is key. With your bad news, appearing strong and presenting alternate strategies is advised.

That said, investor reporting can differ from one company to another, but there’s one thing all LPs look for when hearing updates on their investments: KPI updates.

Present trackable information, like deals closed, ongoing, and initiated, alongside metrics about your portfolio of companies and their current valuations in a visually easy-to-understand manner. It should be presented professionally, but easy to understand.

Stay Connected On Social Media

The world has changed. In 2022, lots of influencing CEOs and VC money roams LinkedIn and Clubhouse. Social media is a prime way to keep in touch and build real, lasting relationships with potential investors.

Connect, comment, and collaborate with experts in your industry. Engage with their posts online and offer up your ideas on topics they’re writing about. Then, try taking those relationships offline and set up lunch meetings and get to know them on a personal level so they become more than a contact. It’s not going to change your network size overnight. This process takes time. But foundation for amazing partnerships will be built if you show them you’re interested in their work and keen to establish a relationship.

It’s also a wonderful space to stand for your ideals, voice your ideas, and create an organic following that will naturally brand you to the right prospects. Build a legacy of sorts leveraging the collective memory pool of the internet. If you don’t have time to do so yourself, you can always hire a virtual assistant/social media marketer/copywriter who can attune to your tone and do it for you. Make sure you’re staying in touch with your followers, gathering new ones, and staying up to date with this new reality of quarterly social trends.

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Executing on this list will make you stand out as a GP, help you maintain relationships, and ease your fundraising process. We covered why investor relations are important, your role in the process, and delved into specific ways how to stand out while doing so.

*Disclaimer

Investing in commercial real estate can be risky. It is not a fit for everyone. While we aim to provide general information to help you better understand CRE investments, we are neither providing any investment advice nor advising for or against any particular investment.

commercial real estate investing

Everything You Need To Know About Real Estate Investment Funds

Plenty of investment opportunities exist today for people looking to grow their wealth and maximize their returns. Whether you’re a veteran or a new general partner running an investment fund, it’s important you brush up on your trade to instill confidence in your prospects so they choose to invest with you.

We’ll touch on how funds work, their different types, how they’re structured, the benefits and risks of being involved with one, and what legal issues to consider.

Let’s begin.

What is a real estate investment fund?

A real estate investment fund is a resource pool that’ll store your investor’s money. When you’re setting up an investment fund, your investors trust you to use this pool wisely, providing them with great ROI at reduced risk – when purchasing securities like real estate and stocks.

How do property investment funds work?

Property investment funds work by having a GP (general partner) collect a pool of capital from other (limited) partners for the purpose of buying real estate properties (or shares).

What are the different types of real estate investment funds?

Three main types of real estate investment funds are available to investors:

  1. Real estate exchange-traded funds (ETFs) are passively-managed investment vehicles that track an index – enabling investors to earn market-matching returns. They’re open to public trading on most major stock market exchanges.
  1. Real estate private equity funds are actively-managed and target institutional investors and HNWI (high net worth individuals). Usually, private real estate funds are only available to accredited investors.
  1. Real estate mutual funds are professionally-managed investment vehicles. They expose money pooled from investors to a diversified portfolio of real estate opportunities, including real-estate publicly-traded companies, REITs, and physical real estate like residential buildings. They’re open to the public and could be accessed via financial advisors or online brokerages, but investors must meet minimum requirements to participate.

What’s the main difference between REITs and real estate funds?

Real estate investment funds and REITs (real estate investment trusts) have some similarities. They’re both pooled sources of capital used to invest in real estate.

However, there are some key differences between them, but the biggest one will be important to your investors: REITs are obligated to distribute 90% of their taxable income back to shareholders in order to maintain their tax-advantaged status with the IRS. But real estate funds don’t have to comply with those rules, making them favorable to investors preferring returns via capital appreciation instead of dividend payments.

Unlike a trust, a fund accepts money from investors at any time in exchange for issuing “units” to investors, often called “open-ended fund”, since the fund is “open” to new investors at any time.

How is a real estate investment fund structured?

Usually, real estate investment funds are set up as a corporation (LLC) or Limited Partnership to allow a group of people to pull their money together and invest in real estate. Also, the investor’s initial investment is paid first, with the fund’s manager or sponsor being entitled to a larger portion – based on the agreed preferred return structure – splitting the remaining profits between themselves and lower-tier investors.

How a fund is structured (whether or not it’s close-ended) determines how the profits are then distributed. Most investors value a real estate investment fund’s structure by how quickly can liquidity be reached, and by how it schedules payments of its profits.

Real estate investment funds can be generally broken into two types:

  • Set end date (closed), like REITs, are structured to distribute profits quickly via dividends, sometimes even on a monthly basis.
  • Open date, like a real estate investment fund. They’re structured to yield long-term appreciation, which can take years, and even decades.

These two are related, but not always directly. For example, appreciation can happen as a result of investing in property development, but also due to changing real estate market conditions.

Who runs a real estate investment fund?

Just like a mutual fund, a real estate investment fund can have passive or active management. Some funds have commission-based fees, while some are managed by an online brokerage that requires a yearly flat rate in order to invest.

Leading a fund as a GP, you have to be a knowledgeable expert who can effectively manage investments. It’s also crucial you stay up-to-date on the latest real estate market trends, so you can best maneuver market shifts—knowing where the next big investment is.

Today, technology is playing a larger role in the management of investment funds and has begun to revolutionize the industry.

How can technology help you start a real estate investment fund?

Technology is changing our world, shifting one industry after another. Our space is affected as well. Starting a real estate investment fund is easier if you’re using the right tech.

Covercy will help you organize your fund, manage finances, and communicate with your investors by letting you:

  • Create and manage your capital calls.
  • Auto-calculate, manage and execute your capital distributions.
  • Slash the risk of phishing and wire-fraud with our secure platform and payments.
  • View the positions of your investors in all assets & funds. Slice and dice as you wish.
  • Give your investors access to their account and view the portfolio’s info, transactions, documents, and reports via an Investor Portal.
  • Call capital in your investment currency; while letting your investors fund them in their selected currency. International Capital Call Payment Processing.

What are the benefits of a real estate investment fund?

Creating a real estate investment fund will create a win-win for you and your investors.

Here’s how:

  • Expose your investors to a healthy portfolio diversification
  • Enable preferred return for your investor, letting them get paid first
  • Produce stable profits in the long-term. Real estate appreciation is proven
  • Help them save on taxes as they become part of your pass-through corporation
  • Give people an opportunity to invest in real estate without having to qualify for financing.

What are the risks of a real estate investment fund?

This might be worrying your LPs, and it’s important you know how to best address it because while a real estate investment fund has many benefits, it doesn’t come without risks.

Here are the two most common pitfalls you’ll need to communicate to your investors:

  1. Real estate funds are structured in a way that avoids having investors withdraw capital early. Make it clear for them it’s a necessary part of how you operate. If liquidating fast is a priority for them, a fund might not be their best route.
  1. With the rise of digital assets flipping at light speed, and SPAC deals replacing traditional, slow IPOs, some investors are looking to cash in quickly. Explain that real estate funds are usually structured to make money over time, which means delayed gratification for the opportunity to reap great rewards.

As for you, on the legal side, it’s important you know:

  • Legal business entity

When starting out, small real estate investment companies (funds) usually don’t form a legal entity. But once you grow, it’s important you protect yourself and your personal assets by incorporating them, with the most common form/structure being an LLC. It’ll provide you with flexibility when markets fluctuate or your needs change.

  • Insurance

It’s vital to insure properties correctly once deeds pass into your fund’s control, so getting the right kind of insurance as an investment property fund is paramount.

Make sure you research and talk to experienced RE attorneys and insurance agents to nail down coverage that best suits your fund. Additionally, work with a lawyer to make your tenant contracts waterproof, clearly stating what are they responsible for, what your limit of liability is, and what’s beyond reasonable coverage.

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Closing

We covered lots of ground today. We discussed what is a real estate fund, its different types, how they’re structured, operate, and make money. We also learned how technology can help propel you forward should you choose to start a fund, or improve upon your existing one. Lastly, we covered some of the benefits, risks, and legalities involved.

Your safe and tech-empowered real estate fund starts here.

*Disclaimer

Investing in commercial real estate can be risky. It is not a fit for everyone. While we aim to provide general information to help you better understand CRE investments, we are neither providing any investment advice nor advising for or against any particular investment.

simplify cre distributions

6 Ways for CRE Investment Managers to Simplify Quarterly Distributions

CRE (Commercial Real Estate) investment managers help develop and enhance a business’s management model for investors in the commercial real estate market. While carefully formulating and essentially minimizing previous managing techniques, investment managers can help their clients keep a direct grasp on their investment return, with easy-to-understand and process reports.

CRE investment managers see several issues daily. While managing their clientele’s investments and ensuring calculations for gains and losses are accurate; investment managers continuously strive to provide the best-in-class performance possible. Having to do all of this without the proper tools or efficiencies can be tough.

To cut back on the time spent managing their client’s investments, several innovative and advanced tools have been compiled. They show CRE investment managers how they can streamline their processes and utilize these technological advancements to better organize and manage their client base.

1. Stop Using Spreadsheets to Manage Your Clients

cre investment manager spreadsheet

This should go without saying. Spreadsheets might seem like the “simple and easy” way to get what you need from the client management system. However, the amount of information that can be monitored through the design of the spreadsheets ends up creating more work to keep the financial information needed accurate and up to date.

Switching to programs such as Covercy, IMS, or Juniper Square will help keep all information organized and easily recalled or updated. Providing you with an organized streamline of all the business that you do.

2. Stop Using NACHA Files

nacha file

If you’ve ever used NACHA files, you already know the struggle and probably rolled your eyes when you read the word. An outdated system that has been replaced by far more advanced payment system options that will appeal to every client.

It is a time-consuming, completely manual system that provides unneeded steps in managing your business and processing payments. Inclusive management platforms complete these processes, produce, and manage reports accurately. Easing investment management’s role as account overseer.

While using Juniper Square or IMS, a NACHA file will be required. However, the Covercy payment platform completely eliminates the need for using NACHA files. All of the payments are done through an end-to-end online. The money goes right from the source platform to the investors’ bank accounts.

3. Automatic Pro-Rata Calculations

CRE investment managers should consider an automatic pro-rata calculation tool that takes all the guesswork and stress out of the allocation of investors’ funds. The system creates a value for clients that ensures accuracy every single time.

Using a cloud-based platform that is easy to use, like Covercy would enable nearly anyone to perform pro-rata calculations and process the distribution payments right in the same window.

4. Having an Investor Portal with The Best-in-Class Experience and Automated Messaging

investor portal mobile phone

We know that an investor portal is something that you may or may not have thought about adding to your management system. If not, now is the time to acquire this groundbreaking technology. You don’t have to hire someone to manually input information each time someone messages your firm, an automated message promptly is dispatched to your client letting them know you are on the task.

Not only does this system automatically generate replies but you can also conduct all correspondence about payments, inventory, distribution, or anything else in your automated reply through the platform.
Having this portal is going to give your company an advantage. Every investor will want to obtain their financial statistics and see accurate reports for any of their investment gains or losses. Through this portal, you’re giving them more control, building trust, and in turn strengthening your investment relationship and potential with your clients. It is a win-win for everyone. What’s on that investor portal?

Expect to see complete breakdowns of all metrics, reports, results, contacts, etc. will help clients to verify their information limiting their need for communication with their CRE investment manager. Staying connected through the portal can help eliminate some of the unknown variables.

5. Use a Waterfall Model That Has Been Carefully Reviewed by Qualified Professionals. Then Use Automated Waterfall Calculations.

We know, we cheated and technically gave you two steps instead of one, but that just means you get more helpful information, right?

Using a waterfall model that is easy-to-understand allows you to quickly assess investment return values for clients. Without intricate loops to jump through to get the answer, investment managers can easily identify gains or loss values for clients through an easy to use platform. Having the model reviewed by a professional before inputting it into the management system ensures accuracy for your clients. Once approved, using an automated waterfall calculation system will generate the results you need.

Some calculations can be challenging for this automated system, such as the private equity fund accounting, but other accounts can be automated to find their calculations and input them into the system for you automatically. Consulting with a professional will help ensure your data is accurate.

6. Use Cloud-Enabled Tech

Having cloud-enabled technology throughout the office is something that is going to safeguard your data. If something, anything, should happen, then you are protected. Storing items in the cloud, especially calculations that are crucial to businesses is going to save you a lot of stress and time. Protecting your client’s sensitive information and your business’s data ensures no one suffers a loss should an unforeseen circumstance arise.

Streamline your processes with being able to save, store, and share files through the cloud, with access through any devices on the service at the same time. This helps to keep documents available to everyone in the office but also helps to keep them protected. The cloud is one of the most secure places to store various online files.