Real Estate Hedge Funds

What are they and should I invest in one?

Real estate hedge funds are a type of investment fund where money is pooled together for many investors in order to acquire and manage real estate. Investors purchase shares of stock in the real estate holdings versus actually owning the real estate themselves. Real estate hedge funds are a truly passive investing vehicle. Each hedge fund has a fund manager who is responsible for investing the capital that is raised. Hedge funds allow participants to own shares of real estate holdings that they otherwise could not afford on their own.

Hedge funds are registered with and regulated by the Securities and Exchange Commission (SEC). There are different kinds of hedge funds and they have different rules such as how it can be advertised and who can join. Some are only open to accredited investors and some are open to both accredited and non-accredited investors. Rule 501 of Regulation D of the Securities Act of 1933 (Reg. D) provides the definition for an accredited investor. The SEC defines an accredited investor through the confines of income and net worth in two ways:

• A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year

• A natural person who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person

A non-accredited investor is someone who does not meet the income or net worth requirements as stated above.

Benefits of a real estate hedge fund and why someone may invest

I am a firm believer of not having all your eggs in one basket and this is particularly important for investing. The main reason to invest in a real estate hedge fund is for investment diversity.

Another reason why someone may choose to invest is because they are seeking a truly passive income source. The typical investor in a real estate hedge fund is someone who already owns real estate but is looking for a more hands-off approach. They don’t want the responsibilities of the day to day anymore that goes along with owning real estate. You can essentially sit back, relax, and receive the quarterly dividends while the fund manager does the work.

Hedge funds are often less risk than owning the asset yourself. Your risk is shared with all the participants in the fund.

A little about the Empire Capital Fund 1

We recently started a real estate hedge fund called Empire Capital Fund 1. Our fund is a 506(b) offering which means both accredited and non-accredited investors can join. Our fund has an investment period of five years. After the five years is up, we will sell the assets in the fund and distribute the profits amongst the investors.

Our fund is targeting a capital raise of $5 million.

Investors receive 60% of all profits and a preferred return of 8% of invested capital paid. Our goal is for the investors to consistently receive returns of 12% or more with a final IRR around 15% once the fund closes. We will make distributions annually with at least 45% of taxable income distributed.

Our Mission: We will capitalize on market opportunities by targeting distressed properties in B & C class neighborhoods in the Lehigh Valley that show consistent population and economic growth. We utilize our existing resources to purchase properties at favorable prices and add value through strong management improvements to properties to drive our appreciation, generate profit and manage risk.

We are targeting two types of distressed properties. First, we're targeting properties that either exhibit poor management or have a history of vacancy problems - these properties are exemplified by deferred maintenance or neglected capital improvements and generally are in need of major cosmetic upgrades. Secondly, we target owner distressed properties. Owner distress can happen from a loss of job, foreclosure, divorce, serious health conditions, and other life changing events. The asset class we target are single family homes, up to large multifamily buildings, maybe 50 units in nature, or small mixed use properties.

Our deployment strategy is two phased. Our goal is to raise capital only as fast as we can deploy it and if we need to generate quick cash for an investment strategy, we may implement our buy fix and flip strategy on small multi-families or single family homes. Ultimately though, the fund is going to look to deploy capital for buy and hold strategies that meet our long term objectives for the fund. Our desired marketplace is the Lehigh Valley and we've dedicated over 10 years to developing, streamlining, and capitalizing on our favorable geographic location. With steady population growth and the need to provide housing for the ever increasing demand in the area we feel that the Lehigh Valley is the most ideal location to target for the fund.

Is there any risk?

Investing in a real estate hedge fund may not be right for everybody. Some of the people that are attracted to hedge funds are people that do not really want to own the real estate; they want to shield themselves from risk - somebody tripping and falling out front of their property, a fire at the property, being sued, etc. Others just do not want to have any involvement in the day to day operations. Although it seems that a real estate hedge fund is a safer bet, there is still some amount of risk. We cannot be sure how the assets will perform; there is no guarantee. But what I can guarantee is that as broker and owner of a top ranked real estate brokerage and property management company, we’re doing what we’ve done successfully for the past 10+ years. We’ve dedicated the past 10 years to developing, streamlining, and capitalizing on our favorable geographic location with steady and projected job and population growth to provide housing for the ever-increasing demand in the area. Using our time tested strategies and knowledge in our market puts us in a great position.

If you’d like to learn more about investing in Empire Capital Fund, please do not hesitate to reach out at GrowingEmpires.com.

This information may not be used as a substitute for financial advice and you should consult your financial consultant for advice if you have any questions relating to this advisor guide.