Why I like Real Estate Funds, NOT REITs

My social media is filled with all sorts of investors, fund managers, and market speculators.

This is how I like to stay relevant and get a general idea of what industries are doing.

Recently I have seen some talk about REITs vs Real Estate Funds.

The problem I see is that people don’t understand the difference between the two.

This leads to all sorts of misinformation…

I’ve talked about this before but I feel the need to discuss further why I like Funds more.

So today I want to try and alleviate some of the misconceptions and give a better understanding of what each one consists of and what my clear choice is.

What is the Difference?

I’ll tell people that I’m starting a Real Estate Investment Fund and they’ll say things like,

“Oh, I’ve invested in REITs before.”

or

“How do you start a REIT?”

And I say, “No, no, no I don’t want to run a REIT, I want to run a Real Estate Investment FUND.”

This usually leads to good conversation because I get to explain the difference to them.

Note: REIT stands for Real Estate Investment Trust

REITs vs. Real Estate Funds

The biggest difference between the two is that REITs are public investment vehicles,

Meaning you could go and invest in them on the stock market if you wanted to.

On the other hand, Real Estate Investment Funds are private and have limitations on who can invest in them.

Because REITs are public, they are required to put out all sorts of documents to satisfy the SEC.

If you are thinking of starting a REIT there are some rules you need to follow:

#1 You need to follow the 5/50 rule, meaning 5 people cannot have more than 50% of the management.

You also need more than 100 investors to really be considered an actual REIT.

#2 You are required to payout 90% of your Net Income in the form of Dividends.

This makes it difficult to retain cash for the company.

Because of this, REITs typically look for Cash Flow Heavy Properties.

Alternatively in a Real Estate Fund, you are free to do whatever you want!

The best thing about funds is that you get to write the “Bible”,

Or the documents that state how your fund will function.

(These are called the LPA and the PPM.)

You can pay out cash flows, or decide to reinvest them.

You can invest in corporate, lease-held developments, or you can buy large multifamily complexes.

It’s up to you.

This is why I like Real Estate Funds.

It gives me the ability to control the investments how I want to instead of being dictated by volatile public markets like REITs are.

One of the best things about Real Estate is that it usually rises with inflation.

My Fund’s performance is based on the assets I hold and so I can expect it to perform well in inflationary times.

Inversely, you would expect REITs to do the same, but they can be influenced by the market’s general sentiment.

Think about when the pandemic first hit…

Stocks crashed, including REITs.

However, many of the people I know that own Real Estate Funds were booming due to lower interest rates and an influx of money into the construction and real estate development industry.

I understand this isn’t always the case and that real estate has it’s cycles just like everything else,

But I like being in control of my assets when things turn for the worse instead of letting others determine that for me.

When it comes to Real Estate Funds vs. REITs you will have more flexibility with the assets you can acquire when using a privately held fund.

Conclusion

RE Funds are typically more niche driven and have a better chance of gaining a competitive advantage in the market.

I choose Funds over REITs because I like having the freedom to pivot and change course with the current market.

Obviously Real Estate isn’t super liquid, but that’s why you create different exit strategies for your fund.

It’s difficult to do that with a REIT.

I also like dealing with high net worth individuals who have invested previously and understand that their money isn’t as liquid.

This makes communication and planning with my investors much easier as well.

Sounds good to me!

What are your thoughts on RE Funds vs REITs?

Which do you prefer to invest in?

Let me know below!

Take Care,

Bridger Pennington

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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.


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