Advice on structuring a real estate fund

4 Replies

Hi All,

My partner and I are looking to launch a private real estate fund (raising money from 10-15 individual investors).  Our plan is to use the pooled funds to invest in a combination of flips and longer-term MF rental properties.  We have engaged an attorney but I am looking to learn as much as possible before we get into the weeds with him. 

There are a million things I'm still trying to figure out but, at the highest level, I'm trying to get my head around the most logical structure for the fund.  Namely, open-end vs. closed-end.

Our vision is to build a portfolio of longer-term rental properties to provide stable cash flow and supplement those with shorter-term flips.  We'd like the flexibility to hold onto attractive rentals for the long term, while also having the ability to continuously reinvest the proceeds from flips.  We'd also like the ability to replace investors (should one want to cash out) to avoid forced asset sales.

I understand the closed-end structure is far more common for real estate funds but various characteristics (e.g., set termination date, defined investment period, inability to change/add investors, inability to re-invest precedes from flips, etc.) seem to conflict with our goals.

Open-end funds seem to address many of these concerns but it seems like there is a much greater level of complexity that comes with that structure. 

Curious if anyone has experience in this area or has dealt with a similar situation. 

Thanks! 

I’ve structured funds with similar strategies and we are administering several funds that have gone the open-end route. The cost and the complexity is very much a concern.

If I were you I’d structure it as a close-end fund with a 2 year fundraise period and a 3 year investment period. You can reinvest proceeds from the flips during the investment period.

You could then start raising for Fund II immediately after the fundraise period expires on Fund I (aka rinse and repeat).

The next move could be to launch an open-end fund that you use as the takeout for the close-end funds. This gives investors the option to stay in or be bought out by new investors coming into the open-end fund.

My personal philosophy is that it’s all about accumulation of assets. By going this route you’re able to take some Promote off the table but retain the performing assets.

Jumping straight to the open-end fund will force you to prematurely have to deal with things like valuation of assets, fluctuating unit prices, redemption rights, etc. Basically you’ll end up spending more time talking to your fund admin and CPA and answering complex questions from investors when you should be focused on acquiring assets and asset management.

Happy to jump on a call to discuss further.



Tyler, I would suggest you look at customizable funds which includes many of the advantages of closed end and open end funds but removes many of the disadvantages. Instead of having to create multiple funds, you can create one evergreen fund with complete business model flexibility. You can raise equity for flips, equity for long term rentals and hard money debt all within the same fund structure.  Investors will the ability to choose which deal they want to invest in within the fund structure and they would still get a single K-1. You can even invest your own capital and then allocate your equity in a specific deal to a new investors. There are several other advantages of a customizable fund and would be happy to discuss this further over a call. We can provide a complete solution for a customizable fund if you do like that option after understanding it. 

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I would recommend a close ended fund. Want to avoid shaky hands and avoid investor relations issues. a 5-7 hold time is really not asking too much from committed investors, it isn't perpetual. 

@Tyler Smith

Some tax considerations - 

Investors in funds are all different, some are okay with filing an extension and filing after April 15. Some are adamant on filing before April 15th.
Their ability to file before April 15 is depending on when the partnership return is completed and when K-1's are provided to investors.

The structure of the fund also depends on the profile of the investors.
Are they all US Individuals or are there a mixture of foreign individuals?
Are there any exempt entities(IRA's / 401k's)

Best of luck