Why Multifamily Real Estate Income Funds Have Distinct Benefits for Investors

This article is contributed by Steve Haskell, Vice President, Kay Properties and Investments, LLC

The recent fluctuations in the United States stock market have many investors looking for more conservative and less volatile investments. That’s why more and more investors are attracted to Real Estate Income Funds. While Kay Properties and Investments is best known for its expert-level knowledge of Delaware Statutory Trust (DST) 1031 exchange investment strategies and opportunities, it also has a reputation for working with nationally recognized real estate sponsors to source and structure All-Cash, Debt-Free Real Estate Income Funds for accredited investors.

What is a Real Estate Income Fund?

In general terms, an “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. 

Three Distinct Benefits of Investing in a Real Estate Income Funds

Diversification. The ability to diversify by investing in real estate funds has attracted conservative investors who want to avoid the concentration risk that often accompanies purchasing one piece of real estate. Typically, real estate investing requires a large down payment to obtain a loan with reasonable terms, tying up a significant portion of investors’ wealth in a single asset. Real Estate Income Funds often allow investors to place a smaller amount of cash into a highly diversified portfolio and, therefore, mitigating risk through diversification. Not only do these 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. However, keep in mind: “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 Certified Public Accountant 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

Some additional benefits of Real Estate Income Funds are:

• Potential passive income and/or income distribution
• Potential monthly cash flow
• Capital appreciation and/or equity growth potential
• Tax advantages through depreciation, interest deductions, and eligibility for 1031 exchange 
• Low minimum investment amounts facilitating portfolio diversification (typical minimum investment amounts are $25,000 to $50,000)
• Professional real estate expertise, including acquisition, financing, property management and 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.

Example of Real Estate Investment Fund: Net Lease Income Fund 28

The Cove Multifamily Income Fund 28, LLC (the “Fund”) is a private placement real estate investment/ Regulation D, Rule 506 C offering for accredited investors only.  The Fund is targeting unlevered/debt-free multifamily assets for accredited investors. In addition the Fund has targeted monthly distributions, although these are not guaranteed and subject to available cash flow. The Fund investment strategy is to acquire and actively manage debt-free multifamily assets across multiple U.S. markets that have value- add potential through physical renovations and/or operational improvements. Markets include: Georgia, Tennessee, South Carolina, and others.

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay’s clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments.  For a look at the types of DST properties investors are using for estate planning purposes please visit the Kay Properties marketplace at www.KayAAGLA.com.  This material does not constitute an offer to sell nor a solicitation of an offer to buy any security.