Should You Invest in Real Estate Funds, Or Individual Deals - The Complete Guide

A passive investor might find it difficult to choose between two of the most common methods for building their real estate portfolio:

Investing in Real Estate Funds, or

Investing in Individual Real Estate Deals

Similar to choosing to invest in a mutual fund vs picking and choosing an individual security.

Several factors come into play when deciding between the two. What might work well for another investor, isn’t necessarily going to be the best choice for you. Here are some of the foremost factors to consider when choosing which method to go with when diversifying and building your real estate portfolio. 

Diversifying Your Portfolio:

Diversifying a portfolio refers to spreading your funds across multiple real estate properties in various geographic locations and sectors to minimize risks should one deal not fall through. It’s an important aspect to consider as an investment is only as good as the returns on that investment.

Geographical Location:

If you acquire a fund manager's services, you might find your investments to be fairly concentrated in a particular region. This is attributed to the fact that most funds operate within a particular region. They have to put in a lot of work before investing your capital, and therefore have done their research beforehand and are now waiting for capital to come in.

On the other hand, an individual deal is as spread out as you want it to be. For example; you can make one deal in Miami and the other in Austin. The downside to this is pretty obvious: you would have to put in the time to go over potential economic growth, market value, etc on your own. 

Capital:

One way to reduce losing money on an investment is to diversify your capital into multiple properties. This is where funds outshine individual deals. A fund manager will diversify your capital into multiple real estate properties and save you the effort of having to go through each deal on your own.

A one-on-one deal has to be carried out by the investor and would therefore not be subjected to any other investment opportunities still in the works. To put it simply, if you haven’t had the time to assess multiple listings, you might end up investing a big chunk of your capital into the first good deal you find. 

Making The Time:

A passive investor is considered as someone who plays a rather secondary role in the entire process. However, bear in mind that it's the passive investor's money that's being spent.

This factor depends on the investor and his or her willingness to undertake the effort of scouting out individual properties and assessing factors such as economic growth, population densities, market growth, etc in every location. 

With a fund, an investor simply gives the fund manager a capital limit that is to be spent. Let's say the investor has capital committed of $500,000. The fund manager will distribute that capital within a period in multiple properties that they and their team have assessed.

An individual deal requires investors to be present to make assessments or to hire a manager for an individual property. This increases the risk of getting into a deal with a bad manager who might get you a deal that results in the devalue of your investment.

Filing Reports:

Every manager has his or her style of formatting a report to be sent to the investor at the end of the year, quarterly or per six-months (whatever the time limit may be).

If an investor chooses to go with a fund, they will receive quarterly reports in the same basic format as they’ve always received. This will be for every one of their investment.

An individual deal gives you an individual report, and a few of them can give you multiple reports in different formats. Now, you might be wondering: Does it make a difference? Yes, it makes quite a huge difference.

You are required to file taxes against your investments based on their performance on the market. This is something neither a fund manager, nor an individual deal manager can undertake for you. What they can do, however, is provide you with the necessary data and schedule k-1 to input when assessing your taxes.

The simple way is to have a fund manager send you reports in a format you’re familiar with to make it easier on yourself and your CPA to sort data out for legal reasons. 

Fee Structure:

Besides the investor and the manager (in either a fund or an individual deal), numerous people work behind the scenes to make an investment possible. Someone must find the property, negotiate the price, create marketing materials and legal documents, raise equity, manage the day-to-day activities at the property, formulate and execute the business plan, report to investors, provide K-1's, sell the asset and distribute the proceeds.

Hence, it isn't a one-man job - which means more people to pay. The amount you pay to a manager syndicating individual deals and a fund manager managing multiple deals is not a whole lot different.

Basic fees include: operational and set up fees, annual asset management fees, performance fees, and administrative fees.

The fees might be similar, but the incentives for the managers are quite different. A good manager, in either case, will want to increase returns. However, it is important to note that a manager syndicating individual deals will be paid a percentage based on the deal with a greater annualized return percentage. A fund manager will be paid based on how well the funds did.

To put it simply, a fund manager has more incentive to make sure the deals pull through because they only win if you win. On the other hand, an individual property manager wins in case any one of your deals produces a generalized annual increase.

Conclusion:
There are pros and cons to both funds and individual deals which is why we offer both at Freedom Venture. Some investors enjoy the diversification of the Fund while other investors enjoy picking and choosing individual deals. Similar to choosing to invest in a mutual fund vs picking and choosing an individual security.