Why Real Estate Income Funds Have Distinct Benefits for Investors

Posted By: Steve Haskell 1031 Exchanges ,

The recent fluctuations in the United States stock market have many investors looking for more conservative and less volatile investments. On top of that, traditional investment instruments like stocks and bonds are similarly not looking very attractive because of their lackluster yield performances. Therefore, more and more investors are attracted to Real Estate Income Funds. 

What is a Real Estate Income Fund?

In general terms, any “income fund” is simply a pool of capital that has been assembled on behalf of a group of investors. There are literally tens-of-thousands of different types of investment funds, including equity funds, bond funds, money market funds, mutual funds, and hedge funds. While direct ownership of real estate has been a popular investment for centuries, recently many investors have also started investing in real estate through participation in a fund.  

A Real Estate Income Fund is a specific subset of funds that is focused exclusively on investing in potentially income-generating real estate. Real estate income funds provide another entry point for those looking to invest in large commercial or multifamily real estate portfolios. Real Estate Income Funds are particularly appealing to retail investors who want to own institutional quality real estate that would normally be out of reach for them. A Real Estate Income Fund pools capital from many investors, and then the fund’s sponsor oversees all the fund’s activities, including performing due diligence, underwriting, and property management. Investing in a Real Estate Income Fund is a great way to potentially generate passive income, gain access to institutional level assets, and avoid the responsibilities of direct ownership. 

An Example of a Typical Real Estate Investment Fund Exclusively Offered by Kay Properties

Net Lease Income Fund 18 LLC: Focused on acquiring, owning, and actively managing a portfolio of single-tenant, Long-term, NNN lease, income producing tenants operating in the industrial, medical, and retail spaces throughout select United States markets. 

This Real Estate Income Fund targets an 8% preferred return* for investors with monthly distributions generated through corporate backed leases. The offering size of this fund is $50,000,000 with a minimum investment of $50,000. 

Example properties the funds seeks to acquire include those leased to recessionary-resistant, essential businesses that remained open and paying rent during the pandemic, such as: Amazon, FedEx, Davita Kidney Care, Frito Lay, Walgreens, UPS, CVS, Coca-Cola, In-N-Out Burger, and 7 Eleven. 

*Preferred return is not guaranteed and is subject to available cash flow. Past performance is not a guarantee of future results. For further information about cash flow distributions from operations and capital events, please refer to the Private Placement Memorandum. 

 

Three Distinct Benefits of Investing in a Real Estate Income Funds 

Diversification

The ability to diversify in real estate funds has attracted conservative investors that want to avoid the concentration risk that often accompanies purchasing one piece of real estate. Typically, real estate investing requires a large down payment in order to obtain a loan with reasonable terms, tying up a significant portion of investors’ wealth in a single asset. Funds allow an investor to often place a smaller amount of cash into a highly diversified portfolio, therefore mitigating risk through diversification. Not only do funds allow investors to diversify in different pieces of real estate all over the country but investors can also diversify their investment by asset type and tenants. Funds may hold multifamily apartments, net lease commercial assets, medical, industrial, etc. Asset types can have varying market cycles. Diversifying one’s investment across asset types and geography can potentially insulate their investment from market volatility. 

*Diversification does not guarantee profits or protect against losses.

Depreciation

An additional benefit to real estate income funds is the potential for depreciation. Many real estate income funds allow investors to depreciate their basis in the fund. The non-cash expense lowers the taxable income incurred from fund’s distributions. This may hold significant benefits for investors in high tax states such as California and New York. Investors should speak to their CPA to determine their own potential tax efficiencies from investing in real estate income funds.

Able to Optimize Both Inflationary and Deflationary Market Cycles 

Finally, the ability for funds to continue to purchase real estate over time allows investors to optimize both inflationary and deflationary market cycles. An inflationary market will theoretically drive up the value of the fund. In a deflationary cycle, the fund may continue acquiring assets, cost dollar averaging as the market retreats. Funds have the flexibility to pick up these assets at a discount. Cap rates often expand in a deflationary market, which will allow investors to potentially realize higher distributions as they wait for the market to turn around. 

Additional Potential Benefits of Real Estate Income Funds

  • Passive income and/or distribution potential
  • May provide monthly cash flow and/or distributions
  • Capital appreciation/equity growth potential
  • Tax advantages 
  • Typically low minimum investment amounts ($25k - $50k)
  • Professional asset management
  • Elimination of day-to-day management headaches

While it is almost impossible to predict what the economic future will look like, many prudent investors are posturing their portfolios to mitigate risk while optimizing their upside potential no matter which direction the market turns. As more investors learn about the potential benefits of Real Estate Income Funds, their popularity will continue to grow throughout the coming years.

Securities offered through Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104. Potential returns and appreciation are never guaranteed, and loss of principal is possible.  Please speak with your CPA and attorney for tax and legal advice.


Steve Haskell is Vice President and DST 1031 specialist at Kay Properties and Investments where he works with 1031 exchange and direct investment clients throughout San Diego County and the rest of the United States.

Prior to coming to Kay Properties and Investments, Steve served for seven years as an officer in the United States Air Force in the special operations community where he led small teams as well as a large staff of hundreds of military and civilian personnel. He has served in numerous locations around the world, including multiple deployments to Afghanistan and locations throughout Africa. Though Steve has retired from active duty, he still serves in the Air Force Reserves.

Prior to his military service, Steve worked in sales and marketing for multiple businesses, which included providing energy management solutions to institutional multifamily apartment owners.

Steve holds a Master’s Degree from the American Military University and a Bachelors in Accounting from Point Loma Nazarene University where he graduated as International Development Student of The Year for his work providing business education to entrepreneurs in impoverished areas in Mexico, Nicaragua, and San Diego