Best Practices for Operating a Real Estate Fund

Real estate funds have made investing in real estate accessible for more people than ever before. Starting a real estate fund can help you capitalize on this trend, but your fund will only be successful if you open and operate it the right way. We’ve outlined some best practices to help you build a sound investment portfolio so your co-investors get the returns they’re looking for.

Outline your investment philosophy.

Your investment philosophy is the set of principles and beliefs that guides your business decisions. There’s no one right way to build your investment philosophy. But real estate fund operators should ask themselves the following questions to get at the root of what matters.

• What asset classes are we going to invest in?

Do you want to invest in multi-family homes? Single-family homes? Industrial complexes? Quadplexes, duplexes, apartments? What about retail space? And why do you want to invest in these properties? Just like an operating business, you should have a detailed strategy on how you plan to invest.

• How are we going to buy our properties?

In other words, how much debt are you willing to take on with your real estate fund? Do you want the purchase to be fully covered by investor capital? Or would you rather leverage your purchase with a mortgage or a business loan? If you do choose to take on debt, how will you make your debt payments? In today’s rising interest rate environment, this step becomes even more crucial.

• What is our risk tolerance?

Each type of investment carries some level of risk. Your tolerance for risk will help you determine whether a purchase is a good fit. For example, let’s say a property you want to purchase will only generate income if you successfully renovate it. You should only invest in that property if you’re willing to accept that development risk. You should also be asking whether the return would justify the risk.

• How long do we want to hold properties?

Your investment timeline will also play into your risk tolerance. How many years do you want to keep a property before you sell it and move on to something else? For some risky investments to pay off, you need to be patient. Know what timeline you’re comfortable with and stick with it.

Select a quality advisory team.

You should never be a team of one. Even if you’re the sole sponsor or syndicator of your real estate fund, have a team of advisors on hand. A few team members to consider are:

• Property Manager

As the syndicator or sponsor of the real estate fund, you may not want or need a property manager. But it’s worth considering hiring one if you have multiple properties or tenants. Property managers can perform a wide range of tasks, including filling vacant units, setting budgets, handling maintenance requests, processing rent checks and more.

• Attorney

Having a real estate attorney to review purchase agreements, mortgages and titles is key. If you find one local to you, they can also track local zoning laws and building requirements to ensure compliance. Attorneys can also — with input from a tax advisor — draft your fund’s operating agreement to help protect your investment.

• Accountant

A CPA can help you optimize each real estate fund investment in a few different ways. They can find deductions, credits and incentives (at the federal, state and local levels). They can also inform you when tax code changes will impact your tax return and act as a trusted advisor. For example, forecasting is especially important for real estate businesses. Accountants can help forecast your properties’ revenues and expenses and estimate how those numbers will impact your tax return.

• Banker

Banking relationships are key in today’s fluctuating market. Having a good relationship with your banker can ensure you get key information as early as possible. They might even be able to pull some strings if there’s a hiccup in your plans.

Know how to market your fund.

Marketing your real estate fund to raise capital isn’t as straightforward as you might think. Whether you plan to solicit funds from friends and family or from the general public, you likely need to comply with regulations from the Securities and Exchange Commission (SEC) and other governing bodies.

Assuming you’re working within the bounds of SEC regulations and utilizing the talents of a qualified real estate attorney, you can begin marketing your fund. At this stage, your goal should be to let potential investors know what you and your fund are all about. Your fund’s prospectus should cover the following:

• Your fund’s goals and business structure
• Your fund’s potential risks and expected returns
• Description of your target market
• How profits will be distributed or used
• How your fund will use debt
• Characteristics of your ideal investor (who they are, amount they want to invest, etc.)
• A broad overview of the conditions of the investment contract (minimum investment requirements, early exit fees, etc.)
• How many investors (and how much capital) you’re seeking
• How your properties will be managed
• How often your investors will receive performance reports
• Who makes up the advisory team
• Your experience as a fund sponsor and/or property manager

Best practices pay off.

The most successful real estate fund operators take time at the onset of their businesses to do things right. By nailing these best practices, you and your co-investors will have a clear vision for the business and can make better decisions moving forward. If you want to talk about opening a real estate fund, reach out to our James Moore real estate team. We help plenty of investors navigate their first real estate fund and would love to help you start yours.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.