In prior articles I shared some of the unique aspects of investing in a fund relative to real estate individual syndications as well as key diligence points to consider when vetting a fund.
As I am often asked by investors on why it may make sense to invest in a fund, in today’s quick snippet I will dive into this topic a bit more.
There are three key advantages of investing via a fund structure:
1. Enhanced diversification.
Depending on the fund type (customizable vs. single asset class), one has the ability to diversify across a number of markets and operators. Proper diversification will depend on the fund manager’s ability to source strong deals in strong markets with experienced operators and vet those investment opportunities via deep diligence. In recent years, the emergence of customizable funds or series funds has also enabled investors to pick and choose their own individual deals via a single fund structure offered by the fund manager.
When it comes to real estate I believe in being a subject matter expert, which enables us to serve our investors the best. This is why at DBA Capital we have intentionally chosen to focus on multifamily (vs. hopping from one asset class to another).
2. More efficient reporting.
Getting hundreds of pages of K1 reports during tax season can be overwhelming. It is also difficult to control the timing of each K1. In a fund structure, investors will usually receive a single K1 that will capture all assets held in the fund. Similarly, monthly/quarterly reports can be consolidated into a single one (while still showing property level details for those who like to peel the onion a few layers deep). Report consolidation becomes especially important as individual investors start growing their portfolios, where managing multiple reports and reporting deadlines can become administratively burdensome pretty quickly.
3. Special conditions/terms.
When investing via a fund, one may be able to enter into marquee deals at a lower minimum required investment amount (e.g. $50-100K vs. $100-250K). In addition, one may be able to benefit from special terms, such as higher preferred return of 8% (vs. 7%) or more favorable carried interest of 80% LP – 20% GP (vs. 70% LP – 30% GP). All of that is contingent on the size of the fund, the fund manager’s ability to negotiate more favorable terms with the operators (in exchange for coming in with a single large investment), and the operator’s willingness to offer better terms (in exchange for having a single large check investor – the fund – vs having to work with multiple retail investors). Depending on the deal size, this may be more favorable for the retail investors. A prime example is Ray Dalio’s Bridgewater Associates $100BN+ fund, which is one of the largest hedge funds in the space and its minimum investment is $100MM+. Its investors are typically large institutions and pension fund who are able to write that $100MM+ check, typically raised from high net worth individuals and family offices, etc.
Being able to take advantage of the fund benefits above is contingent on your confidence in the fund manager’s track record of finding strong deals with proven operators and having a sound vetting process to minimize overall risk and achieve optimal returns.
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to info@dbacapitalgroup.com.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.