Potential Real Estate Fund Cons (and How to Avoid Them!)

by | Feb 21, 2024

Many accomplished professionals hesitate to invest their hard-earned money in a real estate fund for fear of unknown risk. No matter how imminent a high return might seem, a lack of 100 percent guarantee can feel scary, and it is ultimately what keeps a lot of people away from the investment arena.

We get it. In fact, a few years ago, we were you—until we got a chance to explore all of the incredible benefits of investing in a real estate fund. If you’re looking to expand your wealth while saving time, reducing risk, and growing your financial network, congratulations: you’ve finally found the investment opportunity you can trust. 

As with any investment model, a real estate fund comes with its fair share of potential cons. However, we’ve discovered that when you decide to go the real estate route, every potential negative moonlights as a way for you to grow your finances and set yourself free.

What is a real estate fund?

A real estate fund is a unique opportunity for multiple investors to pool their resources and collectively invest in properties and projects. The main benefit is strength in numbers; while you might place a conservative cap on how much you’re personally willing to spend, going in with a bigger group means you have a greater opportunity to enjoy lucrative returns.

The fund is made up of two primary parties: the General Partners (GPs)—sponsors who manage the property and make operational decisions—and the Limited Partners (LPs), the passive investors who contribute capital but don’t directly participate in the property’s day-to-day management.

Potential cons of real estate fund investment

There are plenty of potential advantages when it comes to investing in a real estate fund, but that’s a topic for another day. For now, let’s face our fear of risk together and dive into all the potential negatives; that way, we can best understand how to banish them!

  • Limited control

If you invest in a real estate fund as a limited partner, keep in mind that you’re essentially agreeing to have no control over the operational and strategic decisions related to the fund’s properties. Instead, it’s the GP who makes all of the decisions, from property selection and management style to exit strategies and pivots.

  • Limited liquidity

You should also note that real estate funds are not liquid. This means your money could be tied up for several years, depending on the property’s business plan.

  • Dependence on your sponsor

Since LPs don’t have control over the fund, you’ll be relying entirely on your GPs decision-making skills. Poor choices on their part could potentially result in subpar returns, or even a loss. 

  • Potential conflicts of interest

Depending on someone else to make group decisions poses a risk for conflict. If the entire fund isn’t in agreement when it comes to strategy, your investment could suffer as a result.

Now—let’s reshape our perspective!

Okay, phew. We’ve faced our fears. That wasn’t so bad, was it?

Now, let’s attack them head on, addressing how each of them can be mitigated so you can focus all of your energy on high returns, freedom, and success.

  • Limited control

Sure, a real estate fund investment leaves you with limited control—BUT if you have a team you know you can trust, this potential negative turns into your fund’s superpower. 

Do your research before committing to a fund to ensure you’re working with people who are properly aligned with your goals and aspirations. Once that’s been settled, you can let go of the reins and simply enjoy the fruits of your careful selection. 

  • Limited liquidity

Another potential negative to real estate investment is its lack of liquidity. Essentially, you won’t be able to access your returns until some vague “tomorrow”—BUT what about all of the tax advantages you get to enjoy today? 

From depreciation deductions and 1031 exchanges to mortgage interest deductions and cash-out refinancing, there are plenty of ways your real estate investment fund can make your present a little easier, and more lucrative. Check out this article to learn more about that potential. 

  • Dependence on your sponsor

Again, real estate investment means you have to rely entirely on your GP for success. This could break you, BUT what if it makes you? 

To mitigate this risk, do your due diligence on your GP. Understand what their experience looks like and why/how they make their decisions for strategy. Once you’re sure it aligns with your personal goals, you can move forward with peace of mind instead of mounting doubts.  

  • Potential conflicts of interest

The potential for conflict is always there, BUT it is easily mitigated when you make the decision to establish trust among your investors and GP. 

Is your fund full of like-minded individuals with the shared goal of mutual success and maximum returns? Do your values and morals align? If so, you’re in good company, and the possibility of you clashing on concepts and strategies is much lower. 

Further considerations

No matter your approach, the investment world is never risk-free. However, don’t forget that you have the power in your hands. You simply have to do the research ahead of time to ensure you’ve selected a route with the highest rewards.

Thankfully, that’s where we come into play. Don’t have time or resources to conduct research that feels thorough and informed? That’s okay—all you have to do is reach out to us. We’ll show you exactly how we work with our investors to mitigate risk and increase the odds of high-value returns, providing you with the tools you need to make good financial decisions. 

Contact us today to learn more about Leapfrog Funds and all of the benefits that come with this unique opportunity. 

Continuing the conversation on value-add strategy

Value-add strategies can offer attractive opportunities for real estate funds, especially if you’re an investor looking for a balanced risk level, high-return investment designed to adapt.

To ensure you understand how value-add strategy brings you benefit as an investor, contact us today.

Brenda Jones

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