Why a Real Estate Investment Fund is the Better Answer For Both the Manager and the Investor

My partner and I have been investing in real estate, for ourselves and for others, for over 15 years. In that past, we created private placement memorandums for individual projects and/or properties and paid the returns created by those investments. In addition to being extremely labor intensive, we found that this method severely limited our ability to move quickly on prime investments. After attending a seminar on mortgage pools, we decided that a real estate pool or fund was a more dynamic business strategy, particularly when faced with ever decreasing timeframes for acting on hot properties. The primary purpose of a real estate investment fund is to pool resources to increase the fund’s buying power and leverage over that of a single investing entity. Real estate investment funds have significant advantages over individual real estate investing for both the investor and the manager. Four of the primary benefits are outlined below.

1) Ease of Doing Business – From the investor’s perspective, the investor simply completes a subscription agreement, becomes a member of an LLC, and contributes an initial investment (usually a minimum of $25,000 per fund). At that point, the manager takes over. The investor no longer has to scour the market looking for potential investments. The investor must only decide whether to receive distributions paid by the fund or to re-invest his earnings back into the fund.

From the manager’s perspective, the manager is free to target properties or projects that require quick turnaround decisions and expeditious underwriting. That power is derived from the scope of the investor’s consent contained within the subscription agreement.

2) Decreased Investment Risk – As an individual investor, 100% of your money is potentially at risk with each and every investment. When the investor invests in a pool, however, the individual investor is sharing both risk and reward scenarios with other investors. Additionally, the investor will have diversity in inventory. A competent manager looks across different profit centers to ensure that there is an ebb and flow of low to moderate risk investments throughout the fund. In today’s market, there is no need to undertake high risk investments-there are simply too many good deals out there to require any manager to take unnecessary risks. Targeting 15%+ returns in today’s market is not only realistic, but is a very achievable goal.

3) Fixed Returns on Investments – Although no investment can guarantee returns, a real estate fund can provide the investor with an annual fiscal compass. Most funds will not stipulate to a projected return without having ample confidence that it will meet its targeted goal. Real estate funds today average an annual payout between 9 and 13%. Such averages can provide stability in the mind of the investor, similar to the stability provided by a regular paycheck. Real estate investment funds can provide annualized fixed rates of return investors can bank on.

In most cases, managers pocket the arbitrage above and beyond the targeted return. As such, the manager obviously is motivated to not only meet, but to exceed the targeted return. (Personally, I believe managers should split profits above the targeted return, but this is not the industry-accepted norm.) For example, if a particular fund is targeting 12% returns for its investors and the fund returns 18%, the fund’s manager retains 6% while the investors are paid out 12%. Everybody is a winner. If a deal is win/win, then many more deals will come. Another positive effect of meeting a targeted return goal is that confidence grows for the fund’s management team. This confidence usually results in referrals and thus more capital to be poured into the existing fund or a new one.

4) Higher Returns With Less Hassle – People are busy, and have their own business and personal obligations. Investing the right way can be a full time job. In the fund, the manager does the legwork for the investor. Any solution that promises double the returns of t-bills, bonds, cds, and most municipals and still remains relatively liquid is an attractive alternative in today’s market. Although no investment is bulletproof, real estate investing offers tangible and legal protection for your money. Real property is a much different asset than paper. If a business fails and you own its stock, you have little to no collateral to fall back on. A house, an apartment building, an office or a piece of land are all tangible assets that protect against potential losses. Investing in the fund wraps up all the benefits of investing in real estate while maximizing returns and minimizing effort on the part of the investor.

Although there are other benefits for both investors and managers in a real estate investment fund, these are the four primary advantages. In today’s market, there are other investment vehicles, but few can offer what a real estate fund can. Real estate investing is the most riveting and fluid industry in the world. Take a look at a real estate fund the next time you are looking to invest.

10 Ways to Maximize Your Performance As a Real Estate Investor

Now, this is not a scientific study. I did not go out and survey 5,000 real estate investors and determine who were successful and who were not and then look at the characteristics that shape their success (or lack thereof). This is based on years of personal investing experience and what we have learned from other successful real estate investors.

If you lack these traits (or characteristics), there is a good chance you will under-perform as a real estate investor. You don’t have to have ALL of these, but the more you have, the more likely you will be highly successful.

  1. Passion – I feel strongly that if you have passion, real passion about real estate (and investing in it), you will perform better than if you don’t. We know quite a few investors that are not passionate about real estate that have been successful but they feel worn out and want to leave the business. The only reason they don’t leave is because it’s making them money… but they aren’t having fun and they aren’t making as much money as they would (I think) if they were passionate about it. Besides, why spend so much time, energy, focus, and money on something you don’t love? Life is too short!
  2. Mental strength – There are so many times where you may want to just give up because you’re doing so much heavy lifting mentally. Challenges like insurance issues, and property financing troubles, and tenant challenges are part of the business of real estate investing – be strong and you’ll do well. And by the way – the more physically fit you are – the better you’ll perform mentally. That’s a fact that has been proven by scientific study.
  3. Belief - No one, and I mean no one will (or should) believe in you as much as you do. If you don’t really believe that you can be a successful real estate investor, then you may as well stop trying. There will be times when it seems like you are the only one that believes in what you’re trying to do so you have to be there for yourself! You should also surround yourself with folks that believe in and support you… but that’s a different point.
  4. Guts - You have to be willing to go the opposite direction from the rest of the people you know. You have to be able to make your own decisions and have the guts to take action on them. This is not an easy thing to do especially when you first start out. And, to continue and advance as an investor you will still need guts to try new real estate strategies and techniques.
  5. Integrity – Sadly, I have met many folks who have become successful without integrity but I believe that their success is likely only financial. I am confident they don’t have the relationships nor the personal satisfaction that comes with doing business with integrity. Doing business in a way that treats everyone with respect in turn makes you easier to respect and like… and makes it easier to attract the folks that will help you grow your business.
  6. Focus - This is probably the most underrated trait or action for becoming successful. If you lack focus, it is still possible to become successful. Heck, over the years I have had trouble staying focused but I have still performed fairly well in the REI game. But, my lack of focus has certainly played an important role in keeping me from reaching my full potential. And, the best part about focus, along with most of these other traits is you can learn it/them!
  7. Communication – If you dislike talking to people, emailing, or just all around don’t communicate well with others, good luck performing and being successful with real estate. You have to communicate constantly with realtors, mortgage brokers, banks, accountants, lawyers, vendors, buyers, tenants, appraisers, inspectors, contractors, the list goes on and on. If you aren’t at least somewhat effective at not only getting your point across but also being a good listener and understanding others, forget about being in the REI game.
  8. Hustle – Lining up your joint venture partners, obtaining financing, managing all the appraisers, inspectors, realtors, placing and showing tenants the property all require a large amount of hustle. Sure, you don’t need to hustle 365 days a year to perform well, but you sure better be able to hustle every time a deal starts to come together!
  9. Commitment - Are you committed? Really committed to being an amazing investor? Are you making it a priority everyday that you do something that will move you towards your goal of being a real estate millionaire? Now, you don’t have to do something everyday, but your level of commitment is directly related to becoming better, stronger, faster, smarter, and wealthier. No commitment = Little to no payoff.
  10. Persistent - In my humble opinion, this is absolutely the most critical reason why some real estate investors under-perform. If you want to succeed in this business, you HAVE to be persistent. You will find the best deals by continuously following up on opportunities. You will secure the best financing by continuously trying to find a better option. If your partner backs out at the last minute you have to pick up that phone again and again until you find a new partner. Keep trying, keep pushing, keep being persistent. Do not give up.

Sure, there are likely several more traits that you need to have to rise to the top of the real estate investing pile, but if you have most (or all) of the above, you have a very good chance… in fact I would say you’re darn near guaranteed… to become a successful real estate investor.