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How Investment Funds are Structured, Developed, and Managed

The world of real estate investment is vast, so I can empathize with novice investors who don’t know where to start. Investment funds can be particularly daunting simply due to the complexity of their structure in comparison to a single asset purchase. With that said, if you continuously avoid investment opportunities that intimidate you, you’ll significantly stunt your potential for growth. So, without going into too much detail, I’m going to go over the most common fund structures you’re likely to encounter and then dive into how we develop and manage our funds here at Blue Ridge.


Basic Investment Fund Structures


Now before we dive into it, I want to preface this by saying that this is not an exhaustive list of possible investment fund structures. There are dozens of ways to structure a fund, so I’m going to focus on the most common three.


Single-Asset Acquisition: As the name suggests, a single-asset acquisition involves the formation of a company to hold a single asset (in this case property). This is a way for a group of friends or investors to pool their money to invest in a property they could not afford individually. While this is one of the most straightforward ways to invest in real estate, the structure restricts your investment to a single asset and subsequently restricts your opportunity for growth as well.


Real Estate Private Equity Fund: A private equity real estate fund is essentially a partnership that is created to raise equity for ongoing real estate investment. Under this structure, an individual known as the sponsor creates the fund and seeks out investors (known as limited partners) to invest in return for equity and subsequent returns. The capital raised from investors is then combined with borrowed capital to invest in large-scale real estate opportunities. So, in contrast to a single asset acquisition, a private equity fund is structured to acquire multiple properties, which also multiples your potential for growth.


Real Estate Investment Trust (REIT): In its most basic form, a REIT is a company that owns, finances, and/or manages income-generating real estate. While they are often compared to private equity funds (because they both involve multiple investors and multiple properties), they are actually quite different. Investing in REITs is more easily compared to investing in stocks, in so far as investors earn dividends from the investments without benefitting from capital appreciation. They also have different tax requirements and regulations than a fund structure and therefore must involve a substantial investment base to justify the regulatory hoops and costs of operation.


The Fundamentals of Strategy and Management


While the end goal of most investment funds is to maximize investor returns, the strategy used to get there will vary from one fund to another. Establishing a strategy that works is one of the most critical steps in creating a successful investment fund and as a result is a massive undertaking.


This process requires extensive market research and a trial period, where the strategy is tested on a smaller scale through the purchase of seed assets (without any outside investment). Depending on the outcome of the trial, even more research and testing may be required before a strategy is deemed effective. From there, we spend time gauging interest from outside investors, and only then do we go through the legal aspects of creating a specific fund for that strategy.


At Blue Ridge, it is our strategy that ultimately determines the size of the fund (both in terms of the number of properties and capital investment), the types of assets we purchase (commercial vs. residential), and even their locations. For example, most of our commercial/retail type assets are in the Southeast sector of the country while our residential funds are hyper-localized in upstate South Carolina. These are not hard and fast rules but are based on our experience in those areas. So, while we are not opposed to ‘rinsing and repeating’ investment strategies that work, we always diversify risk by focusing on fund-structured investments that involve varied economies, tenants, and industries.


Once the fund is up and running, the day-to-day decision-making lies largely in the hands of the fund manager. As an investor, you are always given the opportunity to vote on major decisions such as the purchase or sale of an asset — after all, it is your money on the line. However, in my experience, our investors have never shot down a decision that we’ve brought to them and the reason for this is two-fold. One, we don’t make decisions lightly. If we bring our investors a decision to vote on, we’re confident that it’s the best choice for them. And secondly, part of the beauty of investing in a real estate fund is being able to sit back and passively reap the rewards while the professionals manage the nitty gritty.


At the end of the day, a fund is only as good as its reputation, which is why every decision we make (from inception to closing out a fund) is strategically designed to ensure we optimize your return while diversifying your risk — so you get the best of both worlds.

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