Investing in real estate funds: A detailed and easy-to-understand guide (not only) for beginners

Real estate investments are popular, but they are not exactly a simple matter. Should you buy an investment apartment directly, or is it better to invest in a real estate fund? What role does InvestBay play in this situation? Read our comprehensive article, after which you will immediately have a clear picture of all the advantages, disadvantages and the way each option works.

What is a real estate/property fund

A real estate fund is a type of investment fund that pools money from many investors and uses it to buy, manage and sell properties (houses, apartments, offices and commercial premises).

The goal is to generate a profit from rent or from an increase in the value of the properties, with these returns being distributed among the investors according to how much each person has put into the fund.

It is therefore a way for people to invest in real estate even with smaller amounts than they would need to buy a whole property themselves.

Types of real estate funds

By structure, they are divided into:

• Open-end funds (Open-End Funds): Highly liquid investment funds that continuously accept new investors and allow them to redeem their units.
• Closed-end funds (Closed-End Funds): Investment funds with low liquidity that have a limited number of units. These are issued at the start, after which no new investors are accepted into the fund. They can subsequently only be traded on the secondary market.

By the way they are traded, they are divided into:

• Publicly traded funds (Publicly Traded Funds): The shares or units of these funds are traded on public exchanges.
• Private funds (Private Funds): These funds are not traded on public exchanges and are accessible only to qualified or institutional investors. This means that typical retail investors do not have access to these funds.

The structure of a real estate fund

A real estate investment fund is a complex system with a clearly defined structure and roles. Together, they all ensure the efficient management of the fund as well as the profitability of the investments. Within a real estate fund there are:

1. Investors: People or institutions who put their money into the fund. Each investor receives units of the fund.
2. Fund managers: Experts who manage the fund. Their task is to select and buy suitable properties, manage them, and ultimately sell them if it is advantageous.
3. Property managers: Professionals or companies that take care of the day-to-day maintenance and management of the properties. This includes finding tenants, collecting rent, repairs and maintenance.
4. Lawyers and accountants: Lawyers handle all the legal aspects associated with buying, selling and renting properties. Accountants handle the financial management of the fund, bookkeeping and tax matters.
5. Investment committee: A group of experts who oversee the fund's strategy, approve investments and ensure that the fund adheres to its investment goals and rules.

How a real estate fund works: Step by step

1. Investors put their money into the real estate fund

In return, they receive units of the fund.

2. Fund managers select suitable properties

Funds acquire properties through a process that involves many specialized steps. All of them, however, lead to a single goal: to maximize returns while at the same time minimizing risks for investors.

Funds have predefined criteria for selecting properties, which may include location, the type of property (residential, commercial, industrial), size, age, condition and potential for an increase in value.

Based on these criteria, the fund managers then thoroughly research the market in order to identify areas and types of property that have the potential for growth in value and a stable income. They examine economic factors, demographic trends, supply and demand on the market, the level of rents and other factors that affect the value and profitability of properties. They compile a list of potential properties that match the fund's investment goals.

This is followed by what is known as due diligence (an in-depth review):

• Financial review: This includes checking the financial statements, rental income, operating costs and the history of the property.
• Technical review: This includes inspections of the building, an assessment of its technical condition, the condition of the infrastructure and any necessary repairs.
• Legal review: This includes checking the legal status of the property, such as ownership rights, any liens, obligations and disputes.

Once a property passes the review, negotiations begin on the purchase price and the terms of the transaction, the payment dates, the guarantees and any repairs to be made before the property is taken over.

3.Buying the property

After a successful negotiation, a purchase contract is signed that sets out all the terms of the purchase. The fund uses the funds from investors or it can borrow money (for example through a mortgage loan) to finance the purchase.

How are funds financed?

Real estate funds are financed in various ways, which include both equity from investors and debt financing. The most commonly used are:

• Equity from individual or institutional investors (banks, insurance companies, pension funds, foundations and other large financial institutions).
• Initial public offerings of shares (IPOs) and what are known as follow-on offerings in the case where the fund is publicly traded.
• Debt financing through mortgage loans, bonds or mezzanine financing (a hybrid form of financing that combines elements of debt and equity).

Afterwards, the legal transfer of ownership of the property to the fund is completed. The property is incorporated into the fund's portfolio and starts being managed according to the established plans.

4. Property managers take care of the day-to-day operations, rent out the properties, collect the rent and look after maintenance

Property management within a real estate fund is a complex process that involves various aspects ranging from securing leases for tenants to accounting. The fund managers then play a key role in ensuring that the properties generate a stable income and that their value grows.

What exactly do property managers take care of?

• They rent it out: They look for tenants, negotiate and prepare lease agreements, ensure that they are signed and complied with, resolve tenants' problems and queries, ensure communication and maintain good relationships. At the same time they analyze the market and set the rent at a level that maximizes returns without deterring potential tenants.
• They carry out maintenance and repairs: They ensure regular inspections and maintenance of the buildings so that they are in good condition and meet all safety and hygiene standards. Where necessary, they arrange repairs and renovations, and oversee the quality of the work carried out. They also plan and implement improvements to the properties in order to increase their value and appeal.
• They manage the property financially: They keep accurate accounts, manage rental income, monitor expenses and ensure that all financial transactions are properly recorded. They manage rent payments and ensure that tenants pay on time. They prepare and monitor budgets for each property and for the overall fund.
• They keep an eye on compliance with legal and regulatory matters: They ensure that all properties meet local laws and regulations, including building regulations and safety standards. They also handle legal matters, such as disputes with tenants, and ensure legal protection for the fund.
• At the same time, they look for ways to effectively reduce the costs of operating and maintaining the properties.

5.Income from the properties

Income from renting out or selling the properties is collected by the fund. This income is then distributed among the investors after deducting the costs and management fees.

6.Payout to investors

The fund's profits are paid out to investors regularly in the form of dividends or growth in the value of their units.

Investing in a real estate fund vs. Buying an investment apartment

The differences between a real estate fund and a direct investment in property are considerable. They concern in particular:

• liquidity
• diversification
• management
• costs
• risk

TIP: Read more about investment apartments in our article.

How does InvestBay differ from a real estate fund?

Compared with the traditional real estate funds that we have discussed so far in this article, InvestBay differs mainly in its approach. The basic differences could be summed up in the following points:

1. Unlike InvestBay, funds usually buy larger projects and focus on SPVs rather than smaller assets.
2. With InvestBay you know exactly which property you are investing in, along with all the relevant information. We pride ourselves on 100% transparency and keeping people informed, and in a way we are educating the market.
3. The minimum amount of an investment with InvestBay is CZK 2,500 (EUR 100). Ordinary real estate funds cannot match this - they are commonly several times higher. Nevertheless, as with any investment: The more you invest, the greater the return you will receive - and an investment in real estate in particular is one of the less risky ones (compared with shares, for example).
4. With InvestBay you are an indirect owner of the property, with all the benefits. You are part of the decision-making process on substantial matters. You can choose for yourself what you want and what you don't. At the same time, you can actively use the property and visit it. Unlike mutual funds, where as an investor you buy a unit certificate of the given fund and thus entrust your money to the fund manager, with an investment in real estate at InvestBay you buy individual fragments of the property directly. This means you have your investments fully under control.

Are you wondering how much you can earn with InvestBay? Calculate your return on investment with our investment calculator!

How to choose the right real estate fund?

At the end of April 2024, 144 real estate funds were operating in the Czech Republic (data source: CNB). So how do you choose the one to invest your money in? It surely does not need to be emphasized that such a decision requires careful consideration of several key factors.

Once you have set your personal investment goals and studied which types of real estate funds exist, it is time to review them.

• Check the historical performance, the stability of returns, the manager's reputation, the fees on the selected funds and the debt burden on the properties.
• Analyze the fund's portfolio. Look at the type of property the fund invests in and in which geographic areas. A well-diversified portfolio can reduce risk.
• Make sure that the fund's risk profile matches your own risk appetite. Some funds may invest in riskier projects with potentially higher returns.
• Also check the tax aspects of the selected funds.

TIP: Don't understand all those abbreviations? We have put together a glossary of the most commonly used terms and abbreviations for you:

• NAV (Net Asset Value) – The size of the fund - the value of the fund's equity / the net value of the fund's assets after deducting all liabilities. NAV per share is used to value the fund's units.
• Yield – The profitability of the properties, or the ratio of the net annual rent collected to the value of the properties
• LTV (Loan to Value) – The debt burden on the properties / the ratio of the loan to the value of the property, used when assessing the riskiness of a loan
• WAULT (Weighted Average Unexpired Lease Term) – the average time until the end of the lease agreements
• TER (Total Expense Ratio) – the total annual costs of managing the fund

Then all that remains is to find out how easily you can sell your units and whether the minimum required investment matches your financial means. If you are not sure how to choose the right fund, or you need more information, do not hesitate to consult a financial advisor or an expert on real estate investments. A well-informed choice can help you maximize returns and minimize the risks associated with real estate investments.

With InvestBay, everything is transparent, clear and straightforward. Simply explore the current offer of investment properties with their detailed descriptions and invest as much as your current means allow.