Setting up a real estate fund is one of the most exciting and groundbreaking moves you can make in your investment career. It's also not an easy thing to do, and this article will act as a guide to help you set one up correctly.
You'll walk through all the steps you need to take, from choosing your business model to conducting feasibility studies. You'll also learn to select an investment manager and determine reasonable compensation before launching your real estate career. Finally, you'll understand the need for the service of Real Estate Syndication Attorneys in setting up your real estate fund.
What Is Real Estate Fund?
Real estate funds are a means used to pool together money from investors to purchase and manage income-producing real estate assets, such as office buildings and apartment complexes. Real estate funds can be a valuable tool for investors who don't have the means to invest in real estate independently.
How Do You Set Up A Real Estate Fund?
To set up a real estate fund, you must have a plan. It's important to know what you want and how you'll get there. You should write down your goals and outline an essential roadmap for achieving them. Other things to keep in mind when setting up your real estate fund include:
- Conducting A Feasibility Study
Once you've decided on the best real estate fund for your business, it's time to conduct a feasibility study to determine if your idea is feasible and profitable. This means that you'll be looking at how much money the project will need in start-up costs, what kind of returns it can produce, and how competitive the market will be with other similar projects already out there.
A feasibility study should include these elements:
- A market analysis that shows the demand for residential real estate in the area where your property is located, and
- An overview of potential investors who would be interested in such a product or service as yours, which may include research on typical investor demographics.
An efficient feasibility study will go a long way in determining if your real estate fund idea will be worth investing in.
- Choosing Your Business Model
There are two primary real estate fund business models: the 'private placement' and the 'public offering.' The private placement is generally more expensive to launch but gives investors a higher level of control over their investment.
A public offering, on the other hand, is less expensive to launch but offers investors less control over their investment decisions. How much control you have should depend on how familiar you are with investing in real estate and whether you plan on holding onto your fund for a long time.
- Knowing Your Funding Source
When it comes to funding, it's essential to know your source. The answer will depend on the type of fund you're creating and its structure. Know how your fund will be marketed. You can approach different investors—institutional and private. Each has its set of preferences that affect how your fund is marketed. You'll want to ensure you have enough capital to reach everyone who might invest in your current situation.
- Selecting An Investment Manager
The right investment manager can be the difference between making money and losing it. The ideal candidate has experience in commercial real estate investments, is a fiduciary (meaning they are legally obligated to act in your best interests) and has a track record of success in that market. They should help you understand the market and the perfect investment strategy for your fund.
- Finding An Investor Relations Person
Investor relations (IR) is a business function that manages relationships with shareholders and the investment community, including financial analysts and institutional investors. This includes communicating with shareholders about the company's performance, as well as assisting executives in answering questions from shareholders. Finding an investor relations person will help maintain and analyze your real estate investment plans.
- Determining Reasonable Compensation
Finally, it's essential to determine reasonable compensation for all parties involved. Your goal should be to create a fund that generates returns while also legally distributing revenue. To do this, you'll need to consider the market data of similar funds and their respective sizes. You can also use this opportunity to provide incentives for high-performing managers by offering higher payouts than would be available on the open market.
It's important to remember that this process can be complex, so it's wise not to rush through any of the seven steps listed above. However, these steps will guide you through setting up a real estate fund. It is crucial to go through each step to avoid painstaking loss.