Private Funds

Should you consider Investing in those?

Real Estate Investors understand that the benefits of owning real estate come attached to a very active property management. However, some investors don’t have the time and/or the experience to make this type of commitment thus how to enjoy those benefits too?

For those investors who have not the capabilities to analyze and invest in multiple projects at once, do not have a good deal-flow, and have not the time and experience to manage their own assets, it is worth to consider Private Funds.

Since Private Funds can come in different shapes and forms, they can offer multiple options. Some funds specialize in design, development, construction and management of a particular asset class. Some others in acquisition, rehab, managing and stabilizing before selling the projects. In this type of funds, the investors will have a lockup period to give the manager the necessary time to complete their cycle.

Private lending funds are a great option as well. One of the benefits of investing in private lending funds is diversification. The investments in a private fund are diversified across multiple assets and spread across a broad geographic area, which can lower risk compared with just investing in a single asset. The effects of a poorly performing asset are muted by the other better performing ones and If the market for a specific asset-type tanks, the other asset classes may hold up better.

Private lending/equity funds can participate ether with debt or equity with developers, builders and sponsors. Private lending funds participating in Debt will obtain current income and those participating in the Equity side will receive a prefer return plus the possibility of upside.

The differences between Private Funds can impact risk and returns so it’s important that investors do their own due diligence. Here are a few of the key factors that Private Lending Funds may differ:

  • Geographic areas

  • Property type and lien position

  • Underwriting Criteria

  • Redemptions / Liquidity

  • Management Team

  • Reporting

  • Fund Structure

  • Default Rate

  • Leverage

  • Fee Structure

  • Waterfall Distributions

  • Alignment

  • Preferred Return

  • Deal Size

  • Technology

  • Yield vs Interest Rate

When selecting a Private Fund, make sure you select a Fund Manager (not a Fund) who have the character, and capabilities to overcome situations during a market shift. Managers must have a strong strategy for these days, seasoned asset management team, risk-management policies and procedures, a full understanding of the market their serve as well as clear competitive advantages.

Picture by: Markus-Spiske

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