What are the benefits of Real Estate Income Funds?

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Real estate investment funds provide an entry point for those looking to invest in commercial real estate. They are incredibly appealing to those who want to own commercial property but don’t want to handle daily activities—a real estate investment fund pools capital from many investors. The Fund’s sponsor manages all the Fund’s activities, such as property management if a fund buys and renovates or holds property for some time. Investing in a real estate fund is one of the best ways to generate passive income for those interested in owning real estate but who do not want the responsibilities of direct ownership.

What are the benefits of Real Estate Income Funds?

1. Flexibility

It is common to believe that investing in a real estate fund requires an investor to sacrifice flexibility. The truth is the opposite. If you were to invest in one asset, you’d better know that the investment pays off the way you expected it to! But, investing in real estate funds provides more control and flexibility.

In addition, many funds focus on different geographies and asset classes, which allows the investor to determine which types of real estate they want to purchase and where. This will enable investors to customize their portfolios without buying individual assets directly.

2. Profitability

Real estate investment funds are typically structured to return profits to investors before the Fund’s sponsor earns any profit. As a result, the sponsor is very motivated to make sure the deal achieves its intended profit threshold. Funds are structured to keep interests aligned between the sponsor and their investors.

3. Tax Efficiency

Taxes are another benefit of investing in a real estate fund. For example, most funds are structured to stay longer than one year, so unless one of the Fund’s assets is sold within one year, it will be taxed at the long-term capital gains rate instead of the short-term. 

4. Diversification

Funds can offer a wide range of investment parameters, broadening the reach of potential investments. For instance, a fund focuses specifically on a single asset type, but it also can be open to different locations (for example, multifamily investments in core markets across the U.S.). Moreover, a fund might invest in a range of product types in a single market (say, metro Los Angeles).

Individuals can diversify their portfolios by investing in a real estate fund, thus decreasing the risk of having “all eggs in one basket.” This is a good option for one-way investors to protect themselves in the case of an economic downtrend.

5. Preferred Returns

Most private real estate income funds offer investors a preferred return in addition to their pro-rata share of the Fund’s all net profits. Additionally, when no one can guarantee a preferred return, those investors who choose a real estate fund can be sure that they will get the profits from the Fund’s investment activities. This mechanism ensures that the Fund’s sponsor is motivated to achieve their targeted returns; in another case, the Fund’s manager will not be able to earn their share of the profits as anticipated.

6. Absolute Returns

The absolute returns of a fund mean the profit amount the Fund has earned. The absolute returns usually include any additional returns above and beyond the preferred return. Funds that perform extremely well provide absolute returns considerably higher than the preferred return. But keep in mind: a fund’s previous performance does not guarantee its future. Constantly evaluate a real estate fund based on its current merits, past performance, and the sponsor’s experience and track record.

7. No Correlation

Commercial real estate has a low correlation compared to other asset classes (for example, stocks or bonds). This is because of the very illiquid nature of real estate, which cannot be purchased or sold at a moment’s notice. Subsequently, many people will opt to invest in real estate investment funds to diversify and protect their holdings.

8. Qualifications

Individual investors benefit from the experience and qualifications of the fund sponsor when they invest in real estate funds. The sponsor is an industry professional (or team) qualified to oversee a fund deployed in various commercial real estate projects. A high-quality sponsor will provide detailed financials for investors’ review and will gladly answer the questions about their strategy, and how and why the fund’s structure will be successful.

Also, the fund manager handles all day-to-day activities associated with the Fund. So, investors will not be distracted by the nuances of each transaction made through the Fund.

Types of Real Estate Funds

Real Estate Fund Investments

A real estate fund is essentially another form of mutual Fund focused on investing in securities provided by public real estate companies. But real estate mutual funds are different from real estate investment trusts (REITs). REITs are corporations that invest directly in commercial real estate. Investing in them is as easy as buying a stock, shares of which can be bought or sold in a second. However, like other securities, REITs must be registered with the Securities and Exchange Commission (SEC) or seek an exemption from the SEC. This process is complex, time-consuming, and expensive.

Conversely, most real estate mutual funds are free from registration “Regulation D, Rule 506”. 

Self-Directed IRA Funds

Usually, most investors choose to invest in a real estate fund using a self-directed IRA. A self-directed IRA isn’t much different from a traditional or Roth IRA. These plans are unique because they allow investors to choose from a broader range of investment alternatives, including real estate investment funds. Many traditional brokerages will not move funds from a traditional/Roth IRA or 401(k) to a non-traditional investment. That’s why investors looking to go. after this strategy will need to direct the funds from their current brokerage account to an IRA custodian that allows for self-directed investment accounts.

Another benefit of investing in a fund instead of buying an individual investment property is that it allows an investor to diversify their portfolio and, at the same time take a hands-off. Self-directed IRAs are self-directed, and therefore, investors should do their homework to ensure they’re investing with a high-quality sponsor. It is important to estimate the real estate fund’s opportunities and risks, as with any investment.

Multifamily vs. Single-Family

There are several types of real estate investment funds. Even those who are focused on investing in residential real estate will find many different ways to do so. For instance, some funds focus on buying and flipping single-family properties. Other funds are all about rehab and renting multifamily properties. Funds catering to both strategies are legitimate; however, investors should be aware of the tax implications of investing in a fund that flips properties. Incomes generated from these funds will be subject to short-term capital gains tax (a higher rate), but funds that buy, renovate, and hold properties which are then subject to long-term capital gains tax (a lower rate).

How to choose a real estate income fund?

LBC Capital income fund invites you to earn a steady ~8.00% annual return with monthly distributions secured by high-grade residential and commercial real estate. The Fund originates, underwrites, and finances loan transactions on highly-quality real estate properties. These transactions provide an attractive return balance to investors in the Fund.

This invitation is open to Accredited Investors only (as per Regulation D under the Securities Act) who fit any of the following profiles:

  • investors looking for portfolio diversification, total return, or monthly income that meets specific financial suitability requirements. Please email fund manager Boris Dorfman at bdorfman@Lbccapital.com for additional info. 
  • investors funding a self-directed retirement plan

The Fund is approved for investment by self-directed 401 (k) plans and IRAs. Plan holders can transfer their 401 (k) or IRA into LBC Capital’s self-directed IRA – an investment that has proven more profitable than bonds, on the one hand, and safer and less volatile than stocks, on the other hand.

Disbalances in Real Estate market and hunting for the yield | LBC Capital

LBC Capital will be the best choice for financial professionals looking for diversification and capital preservation for clients. 

Should you still have any questions, please, do not hesitate to call our loan advisor for free assistance! 

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