Starting a private real estate investment fund can be a rewarding opportunity for ambitious individuals. A private real estate fund sometimes is called a Private Real Estate Investment Trust (REIT) and can compare to the Public REIT’s that are traded on major stock exchanges. While there can be significant returns and an opportunity to grow your Assets Under Management (AUM), it doesn’t come without risk. For those looking to start a real estate investment fund, the following are a few crucial factors to consider before making the leap, that can help you mitigate risk and maximize returns.
Check out our video on Instagram where Kaz walks us through his thoughts on starting a real estate fund:
Track Record – Have you done a lot of deals where you’ve developed or acquired properties to add value? What kind of returns have you delivered? Real estate transactions can require a lot of expertise to ride the ups and downs of the market especially when you are managing investor money. Investors need to see numbers that demonstrate you and your team are capable of generating risk adjusted returns before making such a large commitment. When competing for capital your track record will be evaluated head-to-head with comparable funds.
Gap in the Market – There are many real estate funds available in Canada and the U.S, with more constantly being added. Since there are many options for investors, it is important to ask the question of why they would invest with you. What does your fund bring to the table that differentiates your fund from the many out there? Maybe you’re targeting a unique asset type, have great strategic partners, or have access to an exclusive development/acquisition pipeline. Whatever it may be, it is important to ensure that there is indeed a gap in the market for your offering, or you may experience difficulties finding investors with a unique selling proposition.
Skilled Team – There are numerous aspects involved in launching a fund, and it requires many individuals with differing skills sets. For example, an exempt market dealer to help raise capital and lawyers to draft legal documentation. Even after the fund is launched, you need to have a team that can manage investor reporting, ongoing financial management, net asset value calculations, investor inquiries, strategic planning, and communication with investors. Before starting a fund, make sure you have a team or can build one that has the capacity to handle the additional responsibilities.
Fund Launch Plan – Related to the above, it is also important to have a solid launch plan for your fund. There are many nuances that need to be in place before starting a fund, which can otherwise cause delays and become very costly. Do you have seed assets or a portfolio that investors would be interested in bringing their capital in? Where will you source accredited and eligible investors? Do you or your team have the ability to market the fund and gather investors with a qualified Exempt Market Dealer (EMD? Has a legal/tax structure been thought out including a mutual fund trust (MFT) with consideration on if you will accept registered investments from an RRSP/TFSA in Canada or a 401K for US funds. How will investor funds be received, trade confirmations issued, and statements issued? These are only a few of the many deliberations that need to be mapped out.
Creating a private real estate fund can be a tremendous next step in your investing journey. The opportunity to build a fund, pool capital, and deliver value in a gap in the market is an exciting and ambitious endeavor. Many of the aspects of a fund launch plan are done by multiple service providers, consultants, and professionals making the whole experience heavily fragmented. How can you keep everything on track and ensure critical areas aren’t missed? At Finalyze, our Plan & Raise services are geared towards helping you put a plan together for a successful fund launch including our extensive network of proven professionals to bring your fund to life! Reach out today for a complimentary consultation to learn how your fund can help you crush your goals!