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REITs – 8 Steps To Start Your Own Investment Fund
It is interesting that real estate crowdfunding have gotten quite some publicity lately. Especially when REITs have be around for so long. Crowdfunding appeals to the notion that individuals with little investment funds can get a piece of the action. Well, the same can be said for REITs. So the only thing new about real estate crowdfunding is that it allows project managers who are conceptualizing these projects easier access to funds with lesser regulations. This means that the secret to making a fortune with crowdsourcing is not in investing in projects, but to actually start them.
Real estate investment trusts (REIT) are funds that own or operate income producing real estate. The types of commercial properties can include hospitals, resorts, shopping malls, warehouses, hotels, or even land rich in raw materials. Residential properties can include single family apartments to muiti-family buildings, etc.
But the concept is simple.
You put your money in as an investor and expect to get returns on it. The fund and the properties will be managed by experts, specialists, and professionals.
Since most people first learn about REITs via the stock market, it is often associated with huge major corporations who list them on stock exchanges to cater to the public. So it might surprise a few to know that REITs can be both publicly or privately held. This also means that you can set up and launch your own fund as long as you are confident enough to make it a success. Private funds do not have the same disclosure requirements as public funds. So there are advantages and disadvantages of going the private route.
8 Steps To Start Your Own Investment Fund
1) Decide what you are going after. An investment is more appealing when it is more focused on a specific niche. A fund focused on shopping malls or hotel chains is more appealing than one that does not have a clear investment focus. A niche would also appeal heavily to people who have a vested interest in it. Here are some ideas to get you started. Buildings targeted at senior citizens, retail properties in high traffic areas, location clusters that banks will not finance.
2) Decide on where to invest. When it comes to real estate, most investors will feel that little bit more secure when the properties concerned are not half way around the globe. Some will not even touch houses that are halfway across the country. Well known locations that get frequent publicity will also garner interest. So unless you have a killer nationwide or global idea, your best chance for success is to identify areas that the investors you have targeted can identify with.
3) Work out how much you need to raise. This is a game for big players. And since you have come this far, you might as well go for it. Anything below 10 million is a small amount. Heck! For major corporations, anything below 100 million is not worth the effort. If the funding that you are seeking is small, you might even have trouble convincing stock brokers to sell your product for you. Because it more or less takes the same amount of effort to sell a $100m and a $10m REIT, a high number will mean a higher incentive for the brokers.
4) Declaration of trust (DOT). This is something you have to prepare that describes the REIT. You want this to be as detailed as possible while keeping it as short as possible. It is like an executive summary of your activities and numbers involved. If in doubt, check with your legal team or your advisors.
5) Distribute the DOT to brokers. Unless you already have a big list of potential investors to market your REIT to, you will need the help of stock brokers to sell your product to their clientele via their marketing channels. Include a letter listing the features and benefits with the DOT so that readers can identify the key selling points with an overview.
6) Welcome feedback. Remember that brokers want to sell a good product and are experts in their own right. So they may come back to you with ideas and advice on changes that would make your offer irresistible to their clientele. Even though you might brush off their inputs as you assume they do not know real estate, make a conscious effort to give it some thought. They are after all trying to help you. Brokers know what their clients want and if you are able to fine tune your product to what the market wants, you should give it serious consideration.
7) Hire a broker. In most markets, the brokerage house will not request for payment fees upfront. They get their payment from the proceeds of the offering or even via a stake in the trust. The fees involved vary from brokerage to brokerage. Have your lawyer scrutinize the contracts before putting your signature on anything.
8) Deliver on your promise. If you are to take the proceeds and do not follow through on your promised activities, you are acting like a fraudulent scammer. So do deliver on your objective and uses of funds as stated in your DOT. REITs are highly regulated investment vehicles. So make sure that you have a team which ensures that you are always compliant. Failure to comply with regulations can not only mean a heavy fine, but a big hit on your reputation as well.
In essence, if you have a big idea for real estate while not having the resources and expertise to make it a form of success. You can hire a credible brokerage firm to handle all the details for you. Their job is to guide you through the whole process. Just remember that you are making use of other people’s investment funds and you are responsible for ethical usage of the funds to achieve business objectives.
There can be REITs within REITs. Here is a list of some common property types in them.
Heath care facilities
Self storage faciities