Real estate investment funds are a means for investors to pursue the benefits of investing in real estate without directly owning investment property assets. These funds mingle the capital contributed by the investor group and use the money to obtain, manage, and sometimes improve commercial property. A private equity real estate fund is an illiquid investment and typically has a holding period of ten or more years. However, some investment funds do not have a planned termination point.
Real estate funds with a planned termination point are called closed-end funds. These investments may be geared toward the acquisition, improvement, and disposition of commercial property with the goal of making a profit on the sale and distributing the proceeds to the investors. Indeterminant funds are more likely to buy and hold, seeking income for investors.
Are these funds different from REITs and DSTs?
Yes, private equity real estate funds share some similarities with REITs and DSTs but have some notable differences. For example, REITs are often traded on public stock exchanges, which allows more potential investors to participate. A wider net for capital is possible because REITs are more liquid and available to non-accredited participants. REITs must distribute at least 90 percent of their taxable income to shareholders.
DSTs (Delaware Statutory Trusts) operate somewhat differently, but like REITs and private real estate investment funds, DSTs can meet the needs of investors looking for passive investment in commercial real estate. Unlike most private real estate funds, investors can use a 1031 exchange to enter or exit a DST. DSTs often focus on a particular real estate sector with which the sponsor has experience.
Unlike with REITs, the participants (referred to as beneficiaries) can’t buy and sell their shares on public exchanges. The liquidity of DSTs is more like that of private real estate investments and also requires the investor to have accredited status from the sponsor.
DSTs are pass-through entities offering tax advantages to the investor. The structure does have some restrictions on what the trustees can do, including an inability to reinvest proceeds in additional property.
What are the types of real estate investment funds?
In addition to private funds, some mutual funds and ETFs (exchange-traded funds) focus on real estate. Mutual funds and ETFs typically have lower investment minimums than the private equity version and don’t require accreditation. However, they all offer the opportunity to invest in commercial real estate without direct ownership and the headaches that accompany it.
When considering a mutual fund or ETF, investors should consider both the performance and the expense ratio. Mutual funds and ETFs may provide lower costs for an investor compared to the management fees for a sponsored fund. Furthermore, they can offer greater liquidity, which is a consideration for some investors. Private real estate funds should be considered long-term investments, from which the potential for earnings is more likely to result from value appreciation.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.
There is no guarantee that the investment objectives of any program will be achieved.
The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.
Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
There are risks associated with REITs and may include but are not limited to the following:
- They may be illiquid with no secondary market.
- Potential difficulty discerning between routine interest payments and principal repayment.
- Redemption price of a REIT may be worth more or less than the original price paid.
- Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.
- There is no guarantee you will receive any income.
- Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.
This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
