Frequently Asked Questions
These types of funds can lend money to established, pre-qualified and experienced property developers who use the funds to build, improve and add value to a diverse range of US residential and commercial properties with a mix of new developments and rehab projects. The loans are secured by first and second position security interests in real estate.
It means that the Fund in question has priority over any other liens or claims on the property if the borrower defaults by not making any interest or principal payments on time. This first-lien position is confirmed by legal documentation and the Fund is registered in the land records where the property is located as being in first position until the loan is paid off.
Many commercial borrowers cannot qualify for a mortgage at a traditional bank these days because lending standards have become so stringent. It is even more difficult for them to qualify if they are self-employed, or if the commercial property is not owner-occupied. Real Estate Funds can make loans to qualifying borrowers who are willing to pay the interest rate the Fund charges because they need the money to complete a short-term project, such as renovating or improving the property, which will result in a higher valuation once the improvements are completed. If the transaction did not make business sense for the borrower to take on the loan or if they could obtain a cheaper interest rate elsewhere, they would not take on the loan from theses types of Funds. The process of arranging a loan from a Fund is normally much quicker and easier than getting a traditional bank mortgage, which can involve extensive and time-consuming documentation and often leads to a rejection of the loan application.
You should look for a fund where you do not have to pay any commissions, fees or asset management charges out of the money your invest. This will ensure that you earn the full interest rate on 100% of your money at all times. Properly managed Funds will charge the borrower a spread over the interest that you, the investor, receive as well as loan origination points. These and other charges will cover the Fund’s expenses and provide a profit to the investors. Therefore, all expenses for administering the Fund should be paid for by the borrower, not the investor.
Successful fund managers can normally demonstrate decades of combined real estate transaction experience across multiple real estate sectors. In addition, they will employ underwriting processes that have been honed by many years’ experience, and will only work with trusted borrowers who have a demonstrable track record and the capacity to ensure that projects are delivered on time and within budget. The Fund Manager’s job is to carefully review the details of every property. The borrower’s finances will be analyzed. Each property should be appraised by certified appraisers or local commercial real estate brokers with specific knowledge of the value of these types of properties where they are located and title insurance should also be obtained.
Investments will always be secured by short term (i.e 24 months or less) first and/or second position loans secured by real estate. The Managers of the Fund should have 100% control of the funds that are paid to the Borrower and should only release these funds once the works associated with the drawdown request have been checked and approved. Every Borrower should also have to put their own money into their project so they have an interest in the success of the project.
Successful fund management teams will have successfully navigated real estate downturns before and should be well positioned to know how to deal with them if they were to happen again. Investments will normally be made to a maximum loan to value which will be typically 30% less than the completed value – and this provides a cushion in case of a real estate market downturn. Many secured real estate income funds only lend money on a short term basis, typically 18-24 months, thereby reducing investors’ exposure to any long term downturn risk.
You should look for a fund where your investment funds can be rolled over from a 401k or IRA at another custodian into a self- directed retirement account that can invest in alternative assets such as a secured real estate income fund. The rollover process is usually simple and the money is transferred to the self-directed IRA account and then invested into the Fund. When handled properly, these rollovers are tax-deferred or tax-free.
The main benefit of investing in a secured real estate income fund is that you could earn a reliable stream of monthly income together with a share of the profits, and your investment will be secured by first and/or second position mortgages on real estate. The fund managers’ experience and knowledge will ensure that only the best investment opportunities to make it to the Fund and this will underpin the interest distributions, profit share and return of capital.
Properties can include multi-unit apartment buildings, mixed-use developments, hotels, medical buildings, shopping centers, office buildings, assisted living facilities or other kinds of commercial projects. Funds may also lend against single-family homes operated as investment properties (not occupied by the owners) and owned by a corporation or limited liability company.
Many Commercial Real Estate Income Funds pay a rate of interest that is much higher than the returns you would get from bank deposits. These types of funds could pay an annual interest rate as high as 8%, and this will normally be paid to investors in equal monthly instalments. In addition, investors may benefit from a share in the profits that the Fund makes, and these returns can be in addition to the interest rate.
Some funds offer the ability of reinvesting your monthly interest payments as well as your quarterly profit share, thereby compounding your return. This can make a significant difference to the overall return that you make and for many investors is the preferred option.
To minimize risk, investors should make sure that the fund manager has a strict and experience-based due diligence process and conducts thorough underwriting of each and every investment. Proper investment management will reduce the risks associated with investments by only seeking opportunities with trusted borrowers who present high quality projects. Successful investment management companies will only invest in projects which meet strict criteria for security and return potential.
These funds are normally structured so that the investor is protected even if anything were to happen to the Fund Manager or its operating partners. One of the benefits of ownership in real estate is that the investment is in a physical property asset, not a financial derivative that is subject to the fluctuations of the stock or bond markets. The Investors’ capital will be pooled in the Fund and then invested in multiple projects across different asset classes for maximum risk diversification. This helps protect your investment.
Interest payments should be held in a reserve escrow account that may be managed by a separate Fund Administration company, ensuring that investor’s monthly interest payments are made on time.
The Fund Managers should maintain insurance coverage on all of its properties to cover such disasters.
You should look for a fund manager whose team is comprised of seasoned asset managers that have the skill, knowledge, and experience to tend to the asset and solve any challenges involving real estate. The fund managers should be experts in the field of that particular asset class, whether it’s a multi-tenant, single family, or an apartment building.
You should look for funds where the Fund Manager underwrites each deal carefully and individually according to strict underwriting criteria based on decades of experience.
Investors in these types of funds can be accredited or non-accredited. Accredited means that the investor’s net worth is at least $1 million excluding the value of their primary residence or they must earn $200,000 a year as an individual or $300,000 a year as a married couple.
With some funds the investment term can be a minimum 18 months. After this period, you will be able to request that your principal be returned by giving the Fund notice, or you should be able to leave it in the Fund for as long as you wish. If you leave your principal in a Fund, it will normally continue to earn interest and any profit share.
The Fund is usually managed by the fund manager. The fund manager will normally have the sole and exclusive right to manage, control and conduct the affairs of the Fund including, but not limited to, the distribution of funds to investors, lending decisions, operational decisions and reporting activities.