Real Estate Funds — an Overview for 2024 (and Beyond) (2024)

Private real estate funds provide a number of features that make them a good alternative or complement to other types of investments in your portfolio — most importantly professional management and built-in diversification. We believe they are particularly compelling now as investors look beyond the traditional 60/40 portfolio for potentially attractive yields.

This article explores real estate funds, and why now is an opportune moment for this approach. We will also address some FAQs on real estate funds and our offerings.

Key Takeaways:

• Real estate funds may make most sense during times of macroeconomic uncertainty.
• Real estate funds offer a variety of structures (debt, LP equity and GP equity), and EquityMultiple will offer a diversity of Fund products.
• As you continually diversify your portfolio, real estate funds may complement other investments with different risk/return profiles.
• Private placement allows investors to access institutional-level funds, at a significantly lower investment minimum.
• Strategies can vary depending on the appetite of the Investor. Funds can focus on a specific asset type in a specific region but can also focus on several asset types in many regions around the country.

Real estate funds may be structured in many ways. At EquityMultiple, our Fund offerings are intended to provide built-in diversification, a high degree of transparency, and potential non-correlation to public markets, while maintaining a low-minimum investment threshold — a feature that is atypical of larger institutional funds.

As of this writing, we find ourselves in a fluid, uncertain macroeconomic environment, with talks of persistent inflation and a potential recession dominating headlines. In fact, for the first time on record, both stocks and bonds had negative quarter-over-quarter returns for three consecutive quarters, per Blackstone.

We feel that now is an opportune time for Fund investing for the following reasons:

1. When investing in a real estate fund, your money will, by definition, be invested over time rather than at a single moment;
2. Investments will be diversified over a collection of assets within the fund strategy, de-concentrating risk;
3. Fund managers will be well positioned to act quickly and opportunistically when distressed investments become available;
4. Longer hold periods will allow fund managers to opportunistically time exits for particular investments to maximize value.
5. Depending on the fund product, some funds will offer distributions on a quarterly or even monthly basis.

Below are a few FAQs on “Fund” investing and EquityMultiple’s fund products.

While diversification is always appealing in times of uncertainty, one type of real estate fund may be particularly appeal now: a CRE debt fund.

This is due to a confluence of factors:

• The rapid rise in interest rates pushing up the rate that private CRE lenders can command
• The credit crunch amid mid-sized banks following the collapse of Silicon Valley Bank and others. This has truncated the supply of debt capital in real estate capital markets, creating opportunity for private lenders (e.g. debt funds)
• With the stock/bond correlation increasing (and bonds thus offering less hedging benefit) the stable income of real estate debt funds may hold extra appeal.

For these reasons, EquityMultiple created the Ascent Income Fund to allow individual investors to tap into this once-in-a-cycle opportunity.

Real Estate Investment Fund Structure

There are three core types of real estate funds:

1. Real estate exchange-traded funds (ETFs)
2. Real estate mutual funds, and
3. Private real estate investment funds

Note: real estate funds are not the same as real estate investment trusts (REITs), which tend to be correlated with the stock market as they can be publicly traded. One exception, however, is real estate ETFs, which are also traded, as they are generally funds that aggregate REITs. At EquityMultiple, we focus on pooling individual investments for private funds, which would otherwise have much higher minimum investment amounts (i.e. $250,000 vs $10,000).

That said, private real estate funds may make use of a private REIT structure to offer the same tax benefits; namely that an individual earning income from a private REIT would not have to file a tax return in all states where that REIT operated or owned interest in property.

Investors can gain diversification to various geographic regions; borrowers, sponsors and managers; security (equity, preferred equity, and debt); and property types.

EquityMultiple, for instance, provides a variety of Fund structures, and the opportunity to invest with differentiated operators. Each Fund investment is intended to provide inherent diversification while maintaining a similarly diligent underwriting and approval process to all our other offerings. On that note, investors also often have the benefit of investing alongside an institutional pension fund or private equity firm.

Depending on structure, the fund may offer flexibility with respect to the timing of investor funding. As an example, a Fund offering on the EquityMultiple platform may require investors to fund 50% of their intended investment at first closing. Over the course of the ensuing 36 months, the fund manager would require investors to fund the remainder of their investment on a rolling, pro rata basis as liquidity is needed for acquisitions by the fund. In this example, investors benefit from not having to contribute 100% of capital up front.

Some investors may prefer to dig into an individual investment’s thesis and select offerings that resonate most with their investing strategy and risk tolerance. Others may allocate more significantly to funds, which carry a higher degree of built-in diversification. We see many investors allocate to both — similar to investing in both individual stocks and to mutual funds.

EquityMultiple’s Fund offerings may provide an added element of diversification to your real estate portfolio with exposure to markets or property and security types otherwise absent from your portfolio. Particular fund operators could have spent years specializing in a market niche which would make them subject matter experts in making those sector-specific investments. As always, EquityMultiple will offer insight into these competitive advantages on each offering page.

For the reasons enumerated above, now may be a good time to consider allocation to commercial real estate Fund offerings.

In a blind pool fund, investors make commitments to the fund without knowing the specific investments to be acquired by the fund. While this structure offers less transparency, there is typically a strategy or target allocation mix that is clearly delineated for investors. It is the management team’s responsibility to identify investments and investor capital is “called” over time to acquire target real estate properties. In this case, a fund manager’s historical track record and experience in the fund’s business plan is paramount.

In an identified fund, the investments are already known and can specifically be marketed to and underwritten by potential investors. Often, all investor capital is “called” at or near the time of the commitment. In addition and because an acquisition target is predetermined, the portfolio can often support current distributions.

EquityMultiple appreciates the merits of identified funds. However, in cases of excellent fund sponsorship and business plan, we will pursue blind pool fund offerings. As always, we will continue to provide our investors reporting and other updates as capital is further deployed by the fund’s manager through our Asset Management and Investor Relations teams.

We may (i) partner with an existing fund manager as a co-manager of an pre-existing or newly-created Fund investment, (ii) partner with a fund manager to distribute a Fund, or (iii) sponsor and manage a newly created Fund entirely ourselves. Our participation within a fund depends on a Fund’s target investments and objectives, investment qualifications, return targets, and/or quality of the Fund manager.

EquityMultiple has already offered multifamily, debt funds, and most recently, a diversified growth-focused portfolio. We will pursue a variety of strategies going forward as market conditions continue to evolve.

In all instances, EquityMultiple’s (and any other third-parties’) role and fees will be transparently detailed within investor documents.

EquityMultiple’s primary considerations in evaluating Fund products will be

1. The risk-adjusted net return potential for our investors;
2. The strength of the fund’s overarching investment thesis; and
3. The quality of Fund management and constituent assets within the Fund’s existing portfolio (in the case of a pre-existing or co-managed fund).

With those primary criteria in mind, EquityMultiple may pursue a variety of focuses or hybrid strategies across various asset classes for potential fund products. Examples of fund strategies include:

• Stabilized multifamily
• GP Equity Funds
• Self-storage properties
• Cannabis facilities
• Distressed assets
• Real estate securities
• Debt Funds

If you have any further questions regarding Fund investing or EquityMultiple’s Fund offerings, please contact Investor Relations — [email protected] — or schedule a call.