Real Estate: Direct Investments vs. Fund Investing – What’s right for you?

February 12, 2018

Real Estate: Direct Investments vs. Fund Investing – What’s right for you?

Every investor knows that putting money into any type of investment – whether the stock market, options trading, real estate, or startups – comes with a certain amount of risk. The key is to find the sweet spot of risk/reward that you’re comfortable with. Of course, everyone would love to put money in the next Facebook, Twitter, or Salesforce, however for each one of those, there are 10 Yik Yaks, Lilys, and Beepis (yes, those are real companies… well, were real companies). From Northstar’s perspective, real estate offers the best risk/reward profile. It probably won’t ever result in a 10X return, but historically it has provided 1X-4X returns consistently. Real estate is one of the oldest forms of investing, and while memories of 2008 are still entrenched in our mind, it’s important to remember that it was a once-in-a-generation event. Today I’ll focus on investing in individual properties versus investing in a real estate fund – specifically weighing the pros and cons. Even in real estate you have countless types of buildings or properties to invest in, and with that, you still have the option to pick your risk appetite.

Real Estate Types

Prior to weighing the pros and cons of funds and individual properties, it’s important to note there are four standard investment types when it comes to real estate investing. For the sake of brevity, below are a few bullet points (though you can read more on these development types by reading our last blog “Are Core Real Estate Assets Worth The Risk?”).

  1. Core – these are your trophy buildings where it’s not uncommon to have them valued at hundreds of millions of dollars. They have strong credit tenants, but offer investors very little upside. Expect 7-10 year holds, with 5%-11% annualized returns.
  2. Core Plus – Similar to Core properties, but offer a bit more upside, along with slightly higher risk – many investors purchase these if vacancy rates are higher in order to fill up the building for a better return. Expect 7-10 year holds with 8%-12% annualized returns.
  3. Value Added – these types of properties give investors high flexibility, albeit at a cost. Think of it as older buildings which can be flipped and redesigned into newer office spaces; or perhaps a poorly managed building that’s in need of a major update. Expect 2-7 year holds with 12%-20% annualized returns.
  4. Opportunistic – these are primarily new construction developments, or highly distressed assets. They need a significant amount of work, which comes with inherent risk, but with major potential upside. Expect 1-5 year holds with 18%+ annualized returns.

Individual Investment Pros and Cons

Many investors typically pick investing in individual properties simply because the potential return is much higher than a real estate fund. It’s not uncommon to see projected annualized returns of 20-25% per year. Northstar typically focuses on value add and opportunistic plays, and just looking over our last three funded projects, our average project return has been 24% per year! Another pro when it comes to investing in individual properties, is information provided on the potential projects. At a minimum, companies should provide detailed financial statements, projected outlooks, Executive Investment Summaries, and a pro-forma. This information at a minimum should give investors a good idea as to what the investment offers, as well as potential setbacks.

While the upside may potentially be great for individual project investments, there are some reasons why it might not be for you. Depending on how many investments you own, putting capital towards one project might be considered “putting all of your eggs into one basket.” The less investments you have, the less diversified you are. Additionally, if you invest in a real estate project, you have very little flexibility if you’re in a crunch for money. While private securities can be transferred, there really isn’t a market or exchange to sell them, and if you are able to sell to another investor, the chances are you will be taking a loss. Finally, when it comes to investing in a single property, you have to understand that it is possible for you to lose your entire investment. You aren’t hedging your risk, and if a significant downturn occurs, then you should be prepared to take a hit.

Real Estate Funds Risks and Rewards

Real estate funds are a fantastic choice if you’re looking for 8%-12% returns a year, along with potential monthly or quarterly dividends. Depending on the fund size, fund managers traditionally spread their risk across a variety of different projects. A traditional spread could be 10% Core, 20% Opportunistic, 45% Value Added, and 25% Core Plus. Of course, this is a simple example, but it gives you a good idea as to how fund managers are able to hedge their risk. Funds are generally a good idea if you don’t want to have excess money sitting in a money market account that returns 1% per year, and your risk appetite isn’t prepared to directly jump into individual assets. Additionally, funds are much more liquid. Depending on the fund, you have more access to your initial investment. While it may take 90 or 180 days to exit the fund (which of course depends on the company running it), it is much easier to receive your initial investment when compared to individual projects. In the end, Funds are a good idea if you’re looking for monthly, quarterly, or annual dividends, alongside a bit more liquidity.

The main reason certain investors stay away from funds, is return potential, typically due to the heavy fees that some funds charge, and the fact they can’t select which asset they want to invest in. Good years may still have an 11% or 12% ceiling, whereas bad years might only net you 2-3%. When compared to individual properties, a great opportunistic investments may return 30% or 40% per year, whereas even a substandard one can still return 15% annualized IRR. Another reason why investors avoid funds, is the fact that property investments are solely reliant on either the fund manager or investment committee. You won’t have a say as to where the fund puts its money. While the committees and managers are subject-matter experts, your hands are not on the wheel when making a decision – something many investors do not

The good news is, prior data shows that real estate investing is a great hedge against inflation, and the market itself typically doesn’t sway nearly as much as the stock market. While hold periods can vary for both individual investments and real estate funds, home and commercial prices typically go up. In our 18-year history, Northstar’s average hold period for our properties is roughly 2.7 years, and we’ve been able to average historical, annualized returns of 26%+. With over 120 deals completed in our history, we aren’t weighted by outliers – we’ve shown a great track record, and we feel incredibly confident in both our individual deals, as well as our real estate funds. If you have any questions, then please reach out to and we’re here to help.

This post was written by Northstar’s Director of Equity, Danny Mulcahy. If you would like to learn more about Northstar, available investments, or current assets, then please contact him at