161 How Liquid Are Real Estate Investment Funds? | Passive Accredited Investor Show

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161 How Liquid Are Real Estate Investment Funds? | Passive Accredited Investor Show

Today on Passive Accredited Investor Show, the Carolina Capital Management team answers the Ugly Question of the day:

“How Liquid Are Real Estate Investment Funds?”

Liquid funds are a type of mutual funds that invest in securities with a residual maturity of 91 days. Assets invested are not tied up for a long time as liquid funds do not have a lock-in period. Return is not guaranteed as the performance of funds depends upon how the market performs, unlike fixed deposits which are not dependent on the market.

With that definition, the answer to the ugly question, how liquid is real estate investment funds, first of all, they are NOT liquid. When you invest in any type of fund it’s not a temporary investment. When you are investing in real estate funds you have a number of years as a plan.


0:01 – Introduction – “If you are investing in a real estate fund, how liquid are real estate investment funds?”

1:02 – https://www.CarolinaHardMoney.com

1:24 – Wednesday with Wendy: https://calendly.com/wendysweet/wednesdays-with-wendy

2:09 – “ The Earnings Season”

2:28 – Breaking News

2:58 – The Housing Market Is Heating Up –

14.6% the price appreciation has gone up since last May.

7:20 – Bill’s opinion: You are not going to see prices going down. What you will see is a slower rate of appreciation.

10:38 – Today’s Ugly Question: “ How Liquid Are Real Estate Investment Funds?”

14:47 – Open-Ended Funds

16:28 – The Most Liquid Type of Fund

17:52 – Would you rather do 1 loan and make 10% or have 5 different loans and make 9.25%?

19:36 – Note Funds & Lending Funds

Carolina Capital is a hard money lender serving the needs of the “Real Estate Investor” and the “Small Builder” borrower who is striving to build wealth and generate income for themselves and their families. We offer “hard money rehab loans” and “Ground-up Construction Loans” for investors only in NC, SC, GA, VA, and TN (some areas of FL, as well).

As part of our business practices, we also serve as consultants for investors guiding them to network with other investors and educating them in locating and structuring transactions. Rarely, if ever, will you find a hard money lender willing to invest in your success like Carolina Capital Management.

Listen to our Podcast: https://thealternativeinvestor.libsyn.com/

Visit our website: https://carolinahardmoney.com

YouTube Channel: https://www.youtube.com/channel/UCYzCFOvEt2n9TchgECLwpww/

Facebook: https://www.facebook.com/CarolinaHardMoney/

Bill Fairman


So the burning question is if you’re investing in a real estate fund, how liquid are real estate investing funds?

Bill Fairman


Our question is, how liquid are real estate investment funds? And that really is a good question-

Jonathan Davis


Depends on how underwater they are.

Bill Fairman


First of all, they’re not.

Jonathan Davis


I mean, you gotta throw it in there.

Bill Fairman


When you invest in a fund of any type, it really is not a temporary investment. If you’re investing in the stock market, you’re not a trader. Traders trade every day, sometimes every hour. But if you’re an investor in the stock market, you have a 3, 5, 7-year plan.

Jonathan Davis


Or sometimes somebody will have 2030, right?

Bill Fairman


The same thing with investing in real estate funds. So you need to have a 2, 3, 5, 10- year plan. It’s no different there.

Jonathan Davis


We get to figure out, are you trying to create principal preservation and get a solid return? Or are you in growth mode? I mean, same thing for thinking about the stock market. Where are you in life? Have you built up a giant nest egg and you want to put it somewhere and protect it?

Jonathan Davis


I would say the most illiquid funds would be those that are syndications on specific properties because typically they’re negative cash flowing for the first year or two, if it’s a heavy value-add or new construction. And then after that, it’s a three to five-year lease up stabilization. So those are very illiquid. You don’t see liquidity until five to seven years down the road.

Bill Fairman


Basically if it’s a new development of a project, it could be a commercial development of single-family housing. How long does it take from the time they get the capital, break ground, put in all the infrastructure, and then start building homes? How long does that usually take for a subdivision?

Jonathan Davis


Depends on how big the subdivision is? I know it takes, gosh, the one we did was for 44 units. It took right at 10 months.

Bill Fairman


Okay. You get into a commercial development with mixed-use, maybe some residential and restaurant, retail. Sometimes they didn’t even have a little bit of hospitality in there and that takes years to finish out. And there is not going to be any liquidity in those at all, until the project finishes out and stabilizes. And you might be in that thing for five to seven years before you start seeing any actual money or even be able to get out of the thing, if something happens. And again, you need to invest with money that you don’t need to touch for quite some time. Now, we all understand that life sometimes gets in the way and there might be an emergency need to get some capital out. If you’re in one of those types of commercial syndications, there is little to no chance that you’re going to get your money back.

Jonathan Davis


The only way you would get your money back is if you could get someone else to take your spot and buy your position out. That would be the only way.

Bill Fairman


Obviously, you’re gonna lose any upside to that investment. And you probably would have to sell that position at a discount, anyway, just to get most of your money back.

Bill Fairman


In an open-ended fund, it’s a lot easier to do that. Most funds have.

Jonathan Davis


When you say open-ended

Bill Fairman


Well, a syndication or a value-add proposition is closed in, meaning it’s going to have a beginning date and an ending date.

Jonathan Davis


And those typically run three to 10 years is pre-tip.

Bill Fairman


And once the fund is filled, nobody can get in or out after that, until the project is complete and it pays out. With an open-ended fund, it just continues. You have investors going in and cashing out through the life cycle. And most of those types of funds are note funds and mortgage funds like ours. Funds that lend money. You can have some that are opportunity funds, where they’re buying properties. Maybe they’re wholesaling properties in them. Maybe they’re doing some fix-and-flip and a little lending. They can have whatever the deal calls for. That’s why they call it an “opportunity fund,” but there’s stuff moving in and out all the time. And it’s easy to do an open-ended fund where people get in and get out. Now it gets a little complicated with owning property and those types of funds because how do you evaluate the value of the portfolio? And you have loans and real estate involved. And that’s one of the reasons we try to make it simple. That’s why we just stick with either notes or lending.

Jonathan Davis


In our opinion, the most liquid type of fund would be a fund that is open-ended and only participates or contains debt instruments. Debt instruments on primarily single-family homes in the United States. Because how many emails do you get a day? How many emails do I get a day from large hedge funds or aggregators of many sorts, “Hey, you got any loans to sell?” Well, we’re, we’re buying lumps, providing loans.

Bill Fairman


All of them have a short-term look at this, too, because they want to do the short-term stuff.

Jonathan Davis


Well, the short-term’s sexy right now. We don’t know what’s going to happen in the future. Short-term helps mitigate that risk of not knowing. And you also are getting a higher level of return then on your, typically, on the 30-year mortgages. So, it is a very sought after item.

Bill Fairman


It’s very difficult to turn to the cruise ship quickly.

Jonathan Davis


One of our members in our fund was texting me last night and asked me the question, “Would you rather do one loan and make 10% with X amount of money? Or, have five different loans and make nine and a quarter percent?” And I was like, that’s a great question. And it said to me that echoes on, like a syndication versus an open-ended debt fund. Syndication would be the one loan at 10%. If it goes well, you’re going to make more money on that type of offering in that fund. On the other side, on the debt instrument fund, you’re going to make less money. But the occurrences of negative activity on these loans is much less. And also you’re diversified across many loans. So if one does go bad, you haven’t lost everything.

Bill Fairman


Yeah, I mean, that goes back to if you’re a banker of any sort, you always want to have five, $100,000 loans versus one, $500,000 loan. Because why you make the same amount of money on both of them, essentially, as you know, you don’t want them on the same block because if

**one of them goes bad, That’s assuming you** (inaudible)

 have to sell it at a discount in and this market, you make profit, but for the most part, you’re diversifying your risk. And you always want to try to diversify your risks. Getting back to the main question, how liquid is your money? Well, the most liquid is going to be note funds and lending funds, especially if the lending fund is doing short-term loans, chances are a loan is going to be paying off every so often.

Jonathan Davis


I mean, they’re six to 12 months, so there’s liquidity there as they pay off. But then on the secondary market, like we were just talking before, the opportunity to sell those loans is another way to have liquidity.

Bill Fairman


Even the opportunity to sell them if they go bad is better because single-family homes for the most part, are the easiest to sell because most people want those. If you stay in the affordable housing side of things, they’re even more saleable because you’ve opened up the investors that would want to purchase them as well.

Jonathan Davis


The thing about those, there’s two loans that we were foreclosing on. Two properties. We didn’t even get to foreclosure. Someone just bought the notes from us. They just bought it for what, you know, we made money on it and they just took it over. It’s pretty liquid.

Bill Fairman


And that’s the case in an up-market. It’s not always going to happen if the market is slowing, but you’re always better off on that side in a lending fund or a note fund in order to do that. You’ve got a little bit more upside if you’re doing the value-add, but you’re going to be less liquid because you can’t pull liquidity out. And if the thing does go bad, you have even fewer people that are going to be interested in buying this. So your buying public is even smaller. So those closed-in funds that are syndicated-like funds, you’re not going to make as much. You have a much higher upside, but it’s going to be less liquid. And then you get into the development stuff.

Jonathan Davis


I mean that same investor in our fund, we were talking about a loan sale and he was saying , “Oh, I’m not sure that’s enough looking for higher yield.” And like, there’s always higher yield out there. It’s always coupled with higher risk or higher levels of work and usually both. So, there’s always more yield out there. It’s just, what are you sacrificing for that yield?

Bill Fairman


And one of the phrases I’m always using is “Return on effort.” And if you’re having to do a lot of effort, is the return that great?

Jonathan Davis


I mean, yeah. I mean, when you, when you look at the number of hours or the sleepless nights that you have to spend, that’s not something I’d rather sleep good every night. That’s just me.  

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