Investors who select individual deals have the freedom to pick and choose what deals they invest in, but this also requires a large amount of time and may not result in the most diversified portfolio. Investing in a real estate fund means giving up control of selecting individual deals to a disciplined manager, but also means saving substantial time and, ideally,receiving a well-diversified group of real estate investments.
1. Time Commitment
With a deal-by-deal approach, an investor would have to source a large number of deals and evaluate every opportunity.Finding a good, trustworthy manager is not easy and the investor only has to find one if investing in a fund.
In a fund, investors receive consolidated quarterly performance reports on their entire portfolio, rather than dozens of individual reports. Each update will follow the same format and illustrate how the individual deals within the portfolio are performing and the overall investment performance at the fund level.
Additionally, year-end tax reporting is much easier in a fund structure because K-1’s, a tax document sent to partners that lists out their share of income and loss for the year, are consolidated into a single document for tax reporting purposes. But an investor in 20 individual deals will likely have to manage 20 K-1’s and the costs associated with filing them.
Diversification is one of the easiest ways to reduce risk. In real estate, investors need to make sure they are not overexposed to any one deal or geographic region. Our funds have minimums of$100,000, but that capital could be spread across 15 to 20 deals. Investing$100,000 on a deal-by-deal basis could easily lead to a portfolio of four to six deals and a single property could easily make up 30% or more of the portfolio. Real estate downturns can often be isolated to a single city or region and having too much concentration in one area can lead to unnecessary risk. Our funds target multiple markets for diversification.
In a fund, the performance fee is paid based on the overall performance at the fund level. In contrast, managers of individual deals get paid based on the performance of each and every deal. This is important because if one deal generates a 20% annualized return and another deal generates a 20% annualized loss, the manager is entitled to an incentive fee on the deal that did well and knows they won’t make money on the under-performing deal. The manager operating in a deal-by-deal structure may be more incentivized to focus on the deals doing well and ignore those doing poorly where they are least likely to earn a fee. The fund manager, in contrast, is highly incentivized to revive under-performing deals.