Investing in a Fund vs. an Individual Investment Opportunity

As a passive investor, one of the more important decisions you’ll need to make is whether to invest in private real estate funds or place your money in individual investment opportunities. Each option has its unique advantages and disadvantages but making the right choice that meets your specific needs will help to maximize the return on your investment.

Property-Specific Syndication - Deal-Specific Advantages

Because the syndication is deal-specific, the limited partner has the opportunity to choose which markets and which assets to invest in. Another key advantage is the ability to research the market and the asset in depth prior to making a choice.

Property Specific Syndication - Lack of Diversification Increases Risk

The main disadvantage is that with an individual property syndication there is a lollack of diversification. The money that you invest is committed to only one asset, rather than several, which could increase your risk if the deal doesn’t perform as anticipated. Your money is also committed to only one market, which can be troublesome if there’s a recession. Not all markets are impacted the same way during a recession, and without diversification you’re unable to minimize any risk.

Private Real Estate Funds - An Experienced Sponsor is Your Kery to Success

Private real estate funds are different from individual property syndication, but there are many similarities as well. Funds are run by experienced sponsors who develop the overall investment strategy, manage all aspects of the investors’ capital, and are responsible for the fund’s performance. Unlike an individual property syndication, the funds are not limited to a single asset class or a single market.

Types of Private Real Estate Funds

There are several different types of private real estate funds, each having their own advantages and disadvantages. An evergreen fund is one where investment returns are recycled back into the fund, rather than distributed to investors. They are advantageous for investors who don’t want their capital tied up for long periods of time. Investors don’t receive sale proceeds in an evergreen fund, but they do have liquidity options, called “redemptions, which are usually within of 90 to 120 days of the request to redeem their investment and liquidate.

There are also open-end funds and closed-ended funds. With an open-end fund, investors are able to enter and exit the funds at specific intervals, which are determined by the fund’s sponsor. Open-end funds have no termination date, and most of the expected return will come from the property’s income stream. With open-end funds, sponsors look for long-term capital appreciation.

With closed-end funds, the strategy is different. Sponsors will purchase properties with a “buy, fix, sell” approach.