How to Start a Real Estate Investment Fund

If you want to prepare for retirement with a diversified real estate investment strategy allowing for tax-advantaged growth, a real estate investment fund could be your ideal vehicle. If you hold your real estate fund within a self-directed individual retirement account (SDIRA), you can enjoy even greater tax advantages and protect your growing savings for lasting wealth.

Setting up the optimal real estate fund structure while complying with financial regulations can be challenging. This guide walks you through the simplest path to starting a real estate investment fund with an SDIRA.

What Is a Real Estate Investment Fund?

A real estate investment fund is a professionally managed investment vehicle that pools capital from several investors to buy, manage or develop real estate assets. Types of real estate funds include:

Open-ended funds: These funds let investors enter or exit at any time.
Closed-ended funds: These funds have a fixed lifespan and typically return capital after selling assets.
Private equity real estate funds: These funds are actively managed and focus on adding value to properties and selling them at a profit.
Mortgage funds: These funds invest in real estate debt or mortgage-backed securities.
Real Estate Investment Trusts (REITs): These publicly traded funds focus on returning rental income to investors as dividends.

Benefits of Real Estate Investment Funds

Starting a real estate fund gives you access to bigger, more lucrative deals by pooling capital from multiple investors. This also lets you invest in various properties and locations, spreading your risks and optimizing the stability of your returns through diversification.

You also have two ways to grow your wealth through a real estate fund. You can focus on collecting rental income, but you may also choose to realize capital gains by improving and reselling properties.

If you start your own real estate fund, the responsibility of professional fund management and due diligence falls to you. The upside here is that you have the final say and can ensure that every investment aligns with your retirement goals and risk tolerance. Meanwhile, though you have significant responsibilities, you can structure your fund as a legal entity to limit your liabilities and protect your personal assets.

Why Use an SDIRA to Start a Real Estate Investment Fund

While you can start a real estate fund with regular, taxable dollars, using an SDIRA to hold your real estate fund works best for several reasons:

Tax-advantaged growth: The income and capital gains your fund’s investments generate grow tax-deferred if you choose a traditional SDIRA or tax-free with a Roth SDIRA. These advantages let you retain more of your wealth and see faster compounding.
Access to retirement capital: Holding your real estate fund within your SDIRA lets you tap in to your retirement funds as well as pooled retirement funds from other investors with SDIRAs to acquire investment properties. To do this, all investments must come directly from SDIRA funds and flow back into an SDIRA.
Flexible diversification: An SDIRA lets you invest in a range of properties within your real estate fund, while also diversifying into alternative assets. This gives you unmatched freedom to build a retirement fund suited to your goals and needs.
Asset protection: Structuring your fund as a legal entity and holding it within an SDIRA gives your fund assets two layers of protection from your personal creditors and lawsuits. It also protects your personal assets from liabilities from your real estate fund.

How to Start a Real Estate Investment Fund With an SDIRA

If you’re ready to start your real estate investment fund, follow these 10 steps.

1. Define Your Investment Strategy and Market Focus

Depending on your preferred risk/return profile, decide how you’ll build and manage your fund. Do you want to focus on certain locations or property types, like commercial properties or rental homes? Would you rather prioritize holding properties and collecting steady rental income, or adding value and reselling them for capital gains?

2. Choose Your Fund Structure and Legal Entity

Choose a legal entity for your fund, like a limited liability company (LLC), to separate the fund’s assets from your own. You’ll also need to decide between open-ended and closed-ended structures, and whether you want a private equity, mortgage or REIT fund. Decide who your investors — limited partners — will be, and who will run the fund — the general partner. Ensure your fund has clear rules that meet all SDIRA requirements.

3. Open and Fund Your SDIRA

Find a qualified SDIRA custodian to help you open your SDIRA account and fund it with your real estate fund’s starting capital.

4. Ensure SEC Compliance and Regulatory Requirements

You can avoid the complexities of full U.S. Securities and Exchange Commission (SEC) registration for your fund by ensuring you meet the requirements for an exemption like Regulation D Rule 506(c). This rule requires you to ensure all your investors are accredited by meeting income or net worth standards.

Your fund should also comply with the Employee Retirement Income Security Act of 1974 (ERISA), federal anti-money laundering regulations and any relevant state laws. A reputable SDIRA custodian can help you navigate compliance.

5. Build Your Fund Management Team

Assembling an experienced team of professionals, including a fund manager, advisors, administrators and property managers, can streamline your responsibilities and enhance the fund’s credibility and performance.

6. Develop Offering Documents and Compliance Materials

Create your essential fund documents, including the Private Placement Memorandum (PPM), operating agreement and subscription agreement, clearly outlining all fees and responsibilities. Your SDIRA custodian can review these documents for compliance before you start accepting investments.

7. Raise Capital and Market Your Fund

Market your fund to accredited investors through social media, online ads and direct network outreach. Your custodian can help ensure that your communications comply with SEC and SDIRA rules.

8. Conduct Due Diligence and Investment Analysis

Protect your fund by conducting thorough due diligence on all potential investments and investors. Real estate rules of thumb can help, including the 2% rule — a rental property should return at least 2% of its purchase price as monthly rent to be a worthwhile investment.

9. Acquire, Manage and Report on Fund Properties

Buy properties that fit your fund’s strategy, leaning on your management team for property management, maintenance and tenant relations. You should provide your investors with regular performance updates and allocate income and expenses according to IRS rules.

10. Plan for Exit and Liquidity

Decide in advance how and when your fund will return money to investors. Your exit strategy could include selling properties at a target date, distributing rental earnings or dissolving the fund after a set number of years. Spell out these strategies with all payment terms and timelines in your fund documents.

Launch Your Real Estate Fund With an Accuplan SDIRA

Starting and running a real estate fund from within an SDIRA can be a profitable way to build and preserve wealth. However, meeting all the compliance requirements is essential to avoid disqualification and unexpected taxes. With Accuplan Ben e fits Services, you can enjoy peace of mind that your SDIRA is compliant and your real estate investments serve your goals.

The Accuplan team consists of world-class SDIRA investing experts, most of whom have been on the team for over 15 years. These attentive professionals will guide you through every stage of your real estate investment journey to help you create the retirement you deserve.

Our information shouldn’t be relied upon for investment advice but simply for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax or investment advice.