Everything You Need To Know About How to Start a Real Estate Investment Fund

distribution waterfall in commercial real estate

We'll touch on how funds work, their different types, how they're structured, the benefits and risks of being involved with one, what legal issues to consider, and of course, how to start a real estate investment fund in just 10 steps.

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:

ETFs: 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.
Private Equity: 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.
Mutual Funds: 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:

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.
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.

How to Start a Real Estate Investment Fund

Here are the 10 steps to start your real estate investment fund:

1. Develop a Business Plan

A business plan is your fund's roadmap. It should outline your investment strategy, target market, expected returns, and how you'll structure the fund. This document will be crucial when pitching to potential investors and will guide your decision-making process.

2. Choose the Right Legal Structure

Most real estate investment funds operate as Limited Partnerships (LPs) or Limited Liability Companies (LLCs). These structures offer liability protection and tax benefits. It's essential to consult with legal and tax professionals to determine which structure best suits your fund's needs.

3. Register Your Fund

Depending on your jurisdiction and fund structure, you may need to register with the Securities and Exchange Commission (SEC) or state securities regulators. Compliance with securities laws is critical to avoid legal issues down the road.

4. Secure Seed Capital

Before approaching outside investors, you'll typically need to secure seed capital. This might come from your own funds or commitments from close business associates. Having initial capital demonstrates your commitment and helps build credibility.

5. Build Your Team

A successful real estate fund requires a strong team. This typically includes experienced real estate professionals, a fund manager, legal advisors, accountants, and property managers. Each member brings critical expertise to different aspects of fund management.

6. Create Offering Documents

Offering documents, including a Private Placement Memorandum (PPM), subscription agreements, and operating agreements, are essential legal documents that outline the terms of your fund. These documents protect both you and your investors by clearly defining rights, responsibilities, and expectations.

7. Market to Potential Investors

Raising capital is often the most challenging part of starting a fund. You'll need to network extensively, attend industry events, and leverage your existing relationships. Be prepared to explain your investment strategy, track record, and how your fund offers value to investors.

8. Implement Technology Systems

Modern fund management requires robust technology. Platforms like Covercy provide tools for capital calls, distribution management, investor communications, and reporting. These systems streamline operations and help you scale efficiently.

9. Start Investing

Once you've raised sufficient capital, it's time to put your investment strategy into action. Start with properties that align with your fund's objectives and risk profile. Conduct thorough due diligence on every investment opportunity.

10. Maintain Ongoing Communication

Regular, transparent communication with your investors builds trust and can lead to additional capital raises. Provide quarterly reports, hold annual meetings, and be available to address investor concerns promptly.

Get Started Today

Starting a real estate investment fund is a significant undertaking, but with careful planning, the right team, and proper technology tools, you can build a successful fund that generates strong returns for your investors.

Covercy provides the comprehensive platform you need to manage your fund efficiently—from capital calls to distributions to investor communications. Our integrated banking and investment management solution helps you focus on what matters most: finding great deals and growing your portfolio.

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