Real Estate Funds

On a scale of 1-10, how much do you like sushi? If you do, you probably have lost count of the times you’ve eaten a California roll, the staple combination of imitation crab with rice, cucumber, avocado, and mayonnaise that meld together to form a salty, creamy, slightly crunchy dish. You probably think of it as the cheap and tasty way to accompany your premium sushi or other favorite dish at a Japanese restaurant. But if most of a California roll (and many other sushi rolls), is made of imitation crab more than anything else, have you ever thought about what it is and what makes it so tasty, yet cheap?

Imitation crab is actually something called surimi, which is made up of a fish called pollock that has been ground down to paste, injected with water, sugar, starches, egg white protein, and crab flavor, then heated and formed into logs that resemble whole crab legs. This has been a great invention for people of most incomes to afford sushi and other dishes while not breaking the bank. However, while crab meat is full of protein, omega-3s, and several vitamins and minerals, surimi is decidedly devoid of many nutrients to make it cheaper. At times, there is a striking similarity between investing & owning real real estate directly vs. investing & owning in real estate funds.

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Overview

While owning the actual real estate and investing in real estate funds might seem similar at first glance, there are actually some very real differences between these two things. Both of these use the basics of real estate to drive returns to an investor, but how they go about it can make a huge difference in what an investor gets at the end of the day.

Just as there are different types of surimi with varying flavors, textures, and additives, there are various types of real estate private equity funds, each with its own investment strategies and objectives. These funds differ in terms of the properties they invest in, the level of risk involved, and the potential returns they offer. But the key thing to remember is that for every additional layer between you (the investor) and the real estate, there is another layer of fees and additives that may remove nutrition and add in empty calories to your food, which might be okay as long as there is complete transparency in comparison to others.

Actual Real Estate Properties (Real Crab Meat) 

Real estate is the physical property you think of when you think about real estate investing, and it makes up everywhere you live, work, and play (and if you include the full expanse of all real estate, provides you food to eat, cell towers for you to communicate, and even medicine you use to heal). In reality, it is composed of two parts: the land itself (where it’s located), and the building on the land (called an improvement to land). There’s a finite amount of land on earth, but the things you can do with that land are infinite (i.e. someone can build an apartment, hotel, restaurant, or a single home, all on the same space). 

Its benefits can include great income, value appreciation, tax advantages, and knowing that it is secured by land, which will mean that it’s very difficult for an investment to go to nothing, even if a building burns down. Real estate benefits from population growth and more people (as tenants) competing to use it for where they live, for their business to operate, and where they go out for fun.

And, just like real crab, whole real estate is not easy to get or invest in. To buy a whole piece of real estate, an investor generally needs a lot of money to start as a down payment, a knowledge of where they want to invest, to know which property to buy (at a fair price), manage the property, collect rents, and make sure it is kept in good condition. With all that time and effort, you can start to see: it’s not easy being a landlord!

For those who don’t have the time to do all that work but still want to get some form of real estate ownership, that is where others will offer to invest on your behalf: enter real estate private equity funds & portfolios.

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Real Estate Funds (Imitation Crab)

Real estate private equity funds are essentially a bunch of people, companies, or institutions that piece up money to give one person or company (a manager) the ability to buy and manage real estate on their behalf. The manager (also called a General Partner) has an idea for an investment or theme of investments that they think they can make a good return from and then creates a business plan and presentation that explains what they think and how they would go about making those returns. They then go and ask various investors (though they’re generally accredited investors) to give them money to go buy real estate that fits their parameters. The nutritious parts of the private equity fund are the underlying real estate assets.

The fund itself is a legal company (typically an LLC), with the sole purpose combining investments from one or other investors and explains the rules of the road for how the manager is allowed to do, and who gets paid for what and when, and what happens if something goes wrong.

At its core, real estate private equity funds and to a certain extent REITs are basically a number of people or companies providing someone they believe to be an expert with a good plan the ability to direct their capital to wherever that expert believes is best, within preset limits.

The reason that these funds are more like imitation crab is that the investors in this fund are actually numerous steps removed from the benefit of owning real estate. And with every step away from the actual real estate, just like the fillers in surimi that take out nutrition from the real thing, there are lots of groups that come in and charge fees and other nuances on the real estate that can make the investment very different from what investors thought it was.

Fund Real Estate Fillers

While there are various types of imitation crab with various exact types of additives, these basically fall into buckets that make up the key factors in fund investing. Here they are:

• Structure - Open vs Closed-End: There are two main types of private equity funds: closed-end and open-end funds. Closed-end funds have a fixed number of shares and typically invest in long-term projects. Open-end funds are more flexible and allow investors to buy and sell shares on a regular basis. See our blog for more detailed information 
• Asset Management & Property Management Fees: These are like the sugar that is added to imitation crab meat. These fees are charged by the fund manager to cover the cost of managing (some times in excess) the underlying assets. They are charged regardless of how the investment performs throughout the hold period, and take out much of the nutrition from the underlying real estate.

• Acquisition &Disposition Fees: These are like the flavoring added to imitation crab meat. These fees are charged by the fund manager when they purchase or sell an asset. However, these fees do not necessarily help the advisor pick and sell the right properties and may incentivize them to buy and sell more than they need to to increase those fees.
• Projected Returns: are like the coloring added to imitation crab meat. These returns are the estimated profits that the fund expects to generate from its investments. However, these returns are made up by the manager, which has an incentive to show an investor the highest number possible that an investor can believe. They are a set of assumptions and may have nothing to do with reality. Of course these are not guaranteed, and actual performance may vary.
• Preferred Return: This is the minimum return that investors hope to receive from the fund and is typically set at a fixed percentage. The preferred return is like the slight real crab meat that you get when you invest in actual property.
• Promoted Interests: are like the molding that is added to imitation crab meat. These fees are paid to the fund manager based on the fund's performance. Promoted interests are typically paid when the fund exceeds a certain level of return, and they are designed to keep the manager focused on caring to continue working their best to maxi

All of these components make up the funds or the imitation crab but most of it strips away the value of nutrients you’d receive if you dealt directly with the real thing. Therefore, any investor should take into consideration these factors when deciding amongst funds or to purchase property on their own. 

Why invest in Funds?

So if there are so many drawbacks, why would anyone invest in a real estate fund? First, real estate is a complex and nuanced asset class. It requires specialized knowledge and experience to select and manage properties that will generate attractive returns. Many investors lack this expertise, and may not have the time or inclination to learn about real estate investing. If an investor believes that a manager is truly skilled and can deliver on their promise, then that trust may be well worth the fees. 

Other than that, regulations may also prevent individual investors from buying real estate assets directly. For example, some countries may have restrictions on foreign ownership of real estate, or may require non-residents to pay additional taxes or fees. Investing in a private equity fund can provide a way for investors to gain exposure to real estate markets that they may not have been able to access otherwise.

And finally, people invest in these funds because they are either the best option of the alternatives based on what has been available so far in history, or there simply aren’t other options and people have been led to believe that this is the only way they can own real estate. That is about to change.

Conclusion

Just like in real life, imitation crab meat is a great invention that has given the experience of crab flavor and texture to many others without having to become a seasoned crab fisherman. At the end of the day, it’s up to you what kind of meat you put into your California roll, poke, crab louie salad, or any other dish you like. However, it’s just as important for you to know what’s in your food, how it can affect you, and make your decisions accordingly.

And now that you understand some of those differences between the two, by reading this blog, you’re already at the forefront of Kopa offering a brand new way to invest that creates sustainable, real crab for everyone while removing much of the difficulty to find them. Stay up-to-date on the latest news and exclusive content from Kopa by following us on social media! Join our community today for behind-the-scenes access and more.

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