Investment funds focused on real estate are a popular choice for investors looking to diversify their portfolios. These funds pool capital from a group of investors and use it to invest in various real estate opportunities. The goal is to generate income and capital gains for the investors through different investment strategies. Real Estate Funds can be structured as Limited Partnerships or Limited Liability Companies and typically have a larger size than DSTs but smaller than REITs. They aim to raise significant capital, often $100 million or more, to purchase income-producing real estate assets. Leverage is often used to increase purchasing power and potential returns.
Investing in a real estate fund is not considered an interest in real estate, so it is not eligible for a 1031 exchange. However, it can still be a valuable addition to a diversified investment portfolio.
Real estate funds are illiquid investments offered to accredited investors or other suitable investors. Accreditation standards limit who can invest, similar to DSTs and other private placement offerings. For individuals, an accredited investor is someone with a net worth of $1,000,000 or more, excluding the equity in their primary residence. Alternatively, an individual can qualify with an income level of $200,000 ($300,000 if married) for the past two years, with an expectation of the same for the current year.
Real estate funds often focus on four main types of investment opportunities: distressed assets, debt, development, and oil & gas.
Distressed asset funds aim to purchase real estate that has fallen into distress for various reasons, such as running out of money during construction or failing to keep up with mortgage payments. These properties are often sold at a significant discount, providing an opportunity for high returns when they are eventually sold.
Debt funds pool capital to originate senior real estate collateralized loans for qualified borrowers. They make money through interest rates and fees charged to borrowers. This type of investment provides consistent cash flow during the hold period but offers limited growth of principal.
Development funds focus on purchasing land and constructing new assets. These projects contribute to the growth of communities and can significantly increase the value of the acquired properties.
Oil & gas funds leverage the global demand for oil and natural gas to provide higher returns for investors. These funds invest in various oil drilling programs, saltwater disposal programs, and royalty programs. While they offer potential for high returns, they are subject to greater volatility due to the fluctuating price of oil.
It’s important to note that real estate funds are blind pools, meaning investors may not know every asset the fund will purchase. Investors should thoroughly understand the fund’s strategy and criteria before making an investment decision. Reading through the Private Placement Memorandum (PPM) and studying the sponsor’s prior success can provide the necessary visibility and understanding to determine if a fund is a suitable investment.
Finally, the real estate fund offerings through Cornerstone are private placement investments accompanied by a private placement memorandum, but there are significant elements of risk that should be evaluated by the investor before purchase. Also, as there is no established secondary market for these interests, they should be considered illiquid investments.