Private party funding is one of the easiest ways to raise capital for investment in real estate. Private funds are usually formed using either companies with limited liabilities or limited partnership businesses. Creating a private fund will provide a way to make the most of a dedicated capital pool to make new investments in real estate without the need to raise money on a deal-by-deal basis. Though private funds are easy to implement, they are structurally complicated, making sophisticated investors participate based on interests between the sponsor and investor while keeping market trends in mind.
There are several distinctive structural issues in private funds that should be addressed. For instance, you must consider whether you want to use a closed-end or open-end fund structure. The open-end structure is favoured by most investors as it is the simplest form and permits you entry into and exit from the fund depending upon the fund’s sponsor. But, problems such as ascertaining a fair value for all investors who contribute and withdraw money from the fund make the open-end structure complicated.
Closed-end funds make investors enter the private fund together and thus eliminate the problems regarding their investments’ initial value. The investment assets of a private funding party appreciate over a period of time if managed in the right manner. Though the process of appraisal is expensive and time consuming, “side pockets” can be used as a solution by private funding parties. Side pockets are internal accounting systems that allow investors access the investment assets of a private fund on investment-by-investment basis.
Private party funding makes it easier to raise capital without having to go through the cumbersome effort of dealing with banks and financial institutions. Private funds can leverage their property investments depending upon the the creditworthiness and indebtedness of the fund.