What is REIF and why should you be a part of it?

Did you know that real estate funds offer many advantages? These funds offer real estate investors the opportunity needed to have increased liquidity, diversification, and access to professional management. At its core, a real estate fund pools money from investors to mutually fund a real estate investment. Typically, these funds are run as an LLC (or other type of entity) and are designed to achieve certain real estate and financial goals.

WHAT IS A REAL ESTATE INVESTMENT FUND AND HOW DO REAL ESTATE FUNDS WORK?

As a mutual investment entity, real estate funds open the doors for investors to invest in various types of properties without applying the same amount of capital that they would as an individual investor. By pooling investor money, real estate funds also give investors the opportunity to explore various types of properties. For examples, some funds might focus on purchasing large residential properties, while others might be focused on buying commercial properties that can be easily sold. While the rules for each real estate fund vary, generally speaking, the funds offer investors the opportunity to more readily liquidate their shares, and thus receive the funds when they need them most.

BENEFITS OF OWNING REAL ESTATE INDIVIDUALLY VS INVESTING IN A REAL ESTATE FUND

Owning real estate individually offers several advantages; however, participating in a real estate fund also has its own set of benefits. From diversification to tax benefits, there are many reasons that you might choose to invest in a real estate fund.

3 Benefits of Owning Real Estate as an Individual

Did you know that there are several benefits to owning real estate as an individual?

1. Tax Benefits. — From writing off expenses associated with your rental properties, to leveraging the power of depreciation, there are several tax benefits that can be enjoyed when you own investment properties as an individual. With the new real estate laws, you can also enjoy pass-through deductions, 100 percent bonus depreciation, and use a 1031 Exchange coupled with a Section 121 to potentially avoid all real estate taxes when sell a buy and hold investment property.
2. Control and Flexibility. — Not only do you get to decide what type of properties you want to purchase, but you also get to determine when, for how much, and where. In short, as an individual real estate investor, you have all of the control and flexibility that you need to create a completely customized portfolio that meets your exact needs, while simultaneously helping you achieve your financial goals.
3. You get all the Profit. — The beauty of owning real estate as an individual is that you receive all of the profit. From monthly rent to the eventual sale of the property, you do not have to split your profits with anyone. However, it is important to note that the flip side of this benefit, is that you also take on all of the risk.

5 Benefits of Investing in a Real Estate Fund

Real estate funds offer several advantages to the savvy investor.

1. Diversification. — Real estate funds offer the opportunity for you to pool your money, and thus purchase different types of assets in various markets. By owning shares in a pool of properties, you can also employ different investment strategies to provide real and true diversification. Additionally, with diversification comes reduced risks, as well as the potential for higher returns.
2. Professional Management. — Like a professional money manager in a mutual fund, a real estate mutual fund offers the benefit of professional management. The latter individual will have a strong real estate background, understands investment strategies, knows how to choose the right markets, and can help you choose properties with the right balance between risks and rewards.
3. Preferred Return. — With a preferred return, you (the investor) will be paid first. If it is a cash flow fund (whereby the investor will get paid throughout the life of the fund). This is incredibly important, especially for higher risk funds, since it means that you will be paid before the professional manager. In this vein, preferred returns often times reduce the financial risk of each investor.
4. You don’t need to Qualify for Financing Yourself. — Real estate funds give you access to better investment opportunities. Pooling the money together creates the opportunity for positive leverage, whereby the interest that you’re paying is less than the internal rate of return that you are investing in. In layman’s terms, this means that you get to make money on the latter spread. Since you don’t need to qualify for financing, you are able to get the very best access to capital so that you can enjoy all of the benefits associated with positive leverage.
5. Tax Benefits. — As a passive investor, you will be able to enjoy additional tax benefits when you invest in a real estate fund. These tax benefits also include pass through depreciation opportunities, up to a 20 percent deduction on your tax return, as well other opportunities to save additional money.

STEPS TO INVESTING IN A SINGLE FAMILY HOME VS A FUND

Investing in the right type of real estate property will require you to do your due diligence. As seen in the below five steps, investing in a single family home requires different steps than participating in a real estate fund.

5 Steps to Buying Investment Property

The below five steps should be followed if you want to purchase an investment property as an individual.

Step #1 Research Different Markets and Property Providers. — The selected market should have good job growth, high real estate markets, increased population growth, and have the opportunity for high cash flow properties. Within these markets, it is important to identify local individual who will provide the management tactics needed to properly lease out turnkey rental properties to the right tenants.

Step #2 If Financing, Get Approved With a Lender. — Before you can purchase a single family home, you must be approved by a lender (unless you are planning on paying for the entire property with cash as a single payment). The type and amount of financing that you receive, will dictate what type of home you can purchase, as well as where and when you can purchase the home.

Step #3 Find a Property & Get Your Offer Approved. — Once you have received your pre-approval for financing, you will be able to find the right turnkey property and make an offer. Upon approval of your offer, it will be time for you to enter into the next stage of purchasing an investment property.

Step #4 Get Inspections, Appraisals & Homeowners Insurance. — During this stage of the buyer’s journey, it is important that you obtain all of the inspections and appraisals that you need for the investment property. Make sure that you thoroughly investigate any “red flags.” A failure to pay close attention to potential problems can result in potential hefty expenses and repairs down the road. Once your home has passed all inspections and appraisals, you will want to purchase homeowners insurance as a precaution.

Step #5 Manage Property Managers and Keep an Eye on Market Performance. — Whether you choose to do everything yourself, or want to leverage the numerous benefits of working with a trusted local property manager, it is important that you keep an eye on the market performance of your investment. Be sure to spend the time needed to review monthly reports, as well as the quarterly reports on the local housing and job market, so that you can know if your rental home is a) priced accordingly, b) generating the positive monthly cash flow that it should be, and c) if market conditions are changing and thus indicating that it is time to sell.

5 Steps to Investing in a Real Estate Investment Fund

The below five steps should be followed if you want to invest in a real estate fund.

Step #1 Research Real Estate Fund Managers and Investment Strategy. — Ultimately there are several types of funds with a wide variety of strategies. You want to choose a fund that aligns with your core values, as well as your financial goals. Additionally, you want your fund manager to have the experience and expertise needed to a) select the right type of real estate assets, b) manage those assets, c) mitigate risks, and d) help you earn the passive income that you desire.

Step #2 Understand Real Estate Fund Return Structure and Timelines. — Every fund as a beginning (when it starts) and an ending (also known as its shelf life). The shelf life of the real estate fund has to meet your financial goals. It is important that you spend the time getting to know the intricate details, as well as how you will be paid, when you will be paid, and understanding the entire timeline.

Step #3 Read Offering Documents. — Even though you are a passive investor, you still have to spend the time needed to “manage” the fund managers. In other words, you need to take the time needed to thoroughly review all of the offering documents. Ask any questions that you might have and clarify any doubts, before you join a real estate fund. Remember, the fund is designed to help you diversify and reduce risks, while simultaneously enjoying the potential for increased gains. However, this does not mean that you should have a “hands off approach;” instead, you need to complete your due diligence from day one.

Step #4 Fill out paperwork, wait for approval, and wire funds. — Joining a real estate fund involves paperwork that must be carefully filled out. You will then need to wait for approval. Upon approval, you will be able to wire the required funds into the escrow account or the fund account.

Step #5 Review Quarterly Updates and Distribution Statements. — As the fund deploys capital and executes strategies a couple of things will happen. If it is a cash flow fund, then you will receive monthly, quarterly, or yearly cash distributions. If there is a preferred return, then you will get paid first. These distribution statements will look similar to any stocks, mutual, or retirement funds that you are invested in. Make sure that you read these statements carefully, so that you can a) know what’s going on and b) make informed investment decisions.

-Jessica Willens (Realwealth)