Real estate is one of the most diverse asset classes and the diversity within the asset class extends to the range of investment vehicles open to family offices. Fixed income investments and listed equities require little continued involvement after purchase save for continued evaluation, strategising, and adjusting allocations. The bar is higher for real estate. Directly investing in real estate requires analytic and due diligence work and then the continued management of properties after purchase. Operating a real estate portfolio often requires forming a separate management company making this investment path the same as starting any new business as the active management of a property portfolio requires expertise, personnel, and capacity. This leads some family offices to work with partners with real estate as their core competency or to invest in real estate through funds.
It can be difficult for family offices looking to diversify their assets into real estate to compare their options. This article pulls together some “back of the envelope” calculations to help jumpstart internal conversations about real estate investing.
Real Estate Funds
Not all funds are equal, but best-in-class investment funds bring to the table the knowledge and capacity to execute winning strategies. They also charge significant fees for access to their expertise. For years, the standard fee structure of funds was “two and twenty.” That is 2% AUM as an annual fee and 20% of the profit. Usually, a minimum profit, often around 7%, had to be reached before the fund managers collected their 20%. High water marks might also be required for fund managers to collect their fees…
