For investors, the starting point when considering real estate funds is education and awareness. The many types of real estate funds include publicly traded real estate investment trusts (REITs) and index funds, which are liquid but generally offer lower income and tend to be highly correlated with equities.
Other options include non-traded and interval funds, which are less liquid but often provide higher yields and greater tax deferral benefits. Private funds, typically aimed at accredited investors, follow specialized strategies. Rich Arzaga, founder of Monument, Colorado-based The Real Estate Whisperer Financial Planning, explains, “A client’s income needs, tax situation and liquidity preferences often drive which type makes the most sense.”
### Diversification is Key
Diversification is also a key concern, says Merriah Harkins, chief sales officer at Phoenix-based real estate investment firm Lukrom. She strongly promotes diversification above all else.
“Private credit, REITs, development funds and other fund structures that provide exposure across real estate asset categories—from multifamily and single-family homes to retail and commercial—spanning both public and private markets and differing risk levels should be considered,” Harkins states.
She adds, “When a client says they can earn 15% here and 8% there, they must understand the level of risk they are taking for the possibility of that higher return. It is critical to be informed about the fund’s structure and the risk mitigation factors.”
### Balancing Risk and Reward
Real estate funds, like other investments, can vary significantly in terms of risk and reward. According to Harkins, “Conservative funds can help balance out the risky funds in the portfolio. This ensures that a diversified portfolio will provide more stable returns and remain resilient when other investments are experiencing significant losses.”
### What Makes a Real Estate Fund Desirable?
The characteristics of a good real estate fund largely depend on client objectives, says Arzaga.
– If the goal is diversification, publicly traded REITs are accessible but can be as volatile as the S&P 500.
– For lower correlation, REITs focusing on different property types—for example, warehouses versus office spaces—can help balance exposure.
– A solid track record, experienced management, and prudent leverage are always desirable traits.
Conversely, Arzaga defines a “bad” real estate fund as one that carries higher, avoidable risk. Examples include newer funds with limited track records, inexperienced managers, or excessively leveraged portfolios.
### Importance of Due Diligence
Due diligence is critical, agrees Harkins. Single-asset projects or funds tend to be riskier than diversified funds spanning multiple real estate types. Also, funds focusing on high-growth metro markets often offer more resilience during challenging market cycles.
“An investor’s due diligence should include the fund sponsor’s track record across multiple economic cycles, the fee structure, available tax advantages—if any—a history of stable returns, and whether the company offering the fund has a significant investment in it, to determine the level of investor alignment,” she advises.
### Looking Ahead: The Future of Real Estate Funds
The cost of credit and real estate assets in many sectors remains very high due to limited inventory, but the trend toward lower interest rates is welcome, according to Harkins.
Lower rates may lead to increased inventory, which could put downward pressure on property values. If a fund is raising substantial capital, it should prioritize sound economic decisions, particularly when there is a risk of investing in properties vulnerable to market fluctuations.
“The investments need to make sense. To meet the stated expected return of a fund, you must determine whether the real estate in the fund will be improved enough to overcome those factors,” Harkins states.
She emphasizes, “Understanding how much debt the fund plans to assume and the terms—whether fixed or variable—is also important, given interest rate fluctuations and uncertainty.”
### A Long-Term Perspective
Overall, Arzaga views real estate as a long-term investment. Because property types cycle over time, trying to “time” which sector will outperform is usually a moot point.
“For investors with a long horizon, the current market can be just as productive as others provided the fund structure aligns with the client’s needs,” he concludes.
https://www.financial-planning.com/list/10-best-and-worst-real-estate-funds-of-the-past-three-years
