Andrew Carnegie once said, “Ninety percent of all millionaires became so through owning real estate.”
We’re not one to argue with those wise words: investing in real estate can help you hedge against market volatility and reduce your tax burden. This begs the question though: how will you invest in real estate?
You could purchase a property to manage yourself, for instance. Or invest in a REIT to remove yourself from the day-to-day of tenant management. Somewhere in the middle is the option to invest in a real estate fund. In this article, we will outline what a Co-GP Fund is, and why it presents such a fantastic and unique opportunity to invest in real estate.
Why invest in real estate?
Before diving into the specifics of a Co-GP fund, let’s first examine why investors might want to consider investing in a passive fund.
We’ve all heard that we should “invest” or “diversify” in real estate. For most people, that might mean purchasing their first principal residence or owning their first “real” asset. Not long after purchasing a property, you will begin to see how real estate can be a great investment and wealth-builder.
Few will take the next step of turning their home into a rental property or purchasing an investment property. The primary reason (finances aside) will be fear. Fear of dealing with tenants missing rent payments and causing damage, carrying multiple mortgages, and costly maintenance expenses. All of these concerns are valid and frighten many away from investing in real estate, but they miss out on the cash flow, appreciation, depreciation, and tax benefits of owning investment properties.
If you fall into that camp, let us assure you that purchasing a property and managing tenants is not your only option for building wealth through real estate. We’ll explore those options next.
How to invest in real estate
For investors looking to dip their toes into the waters of real estate investing, you have a few options:
- Purchase property (which we discussed)
- Invest in a REIT
- Invest in a fund (like a Co-GP Fund)
As mentioned above, purchasing property is a common way to get into real estate investing, but it comes with its downsides as well. For investors looking to take a passive approach, you could invest in a REIT or a fund.
A REIT (real estate investment trust) allows you to own a small percentage of a large number of properties and get some of the same benefits of owning your own rental portfolio. With a REIT you invest passively as an LP (Limited Partner) and don’t have the headaches or liability of owning/managing the properties.
This strategy is great for many investors, but what are they giving up in return for that passivity? Higher returns. The REIT Sponsor is the GP or “General Partner” in the investment and receives a larger return than the LP investors. While you may see an 8-15% return on your money, the GP will usually see upwards of 20+% or greater.
For investors looking for the same passive approach, but a larger return, a Co-GP fund is a great option to consider. A Co-GP fund will allow you to passively invest (like an LP) but reap the same benefits that the GP receives. We’ll examine this option in much more detail next.
What is a Co-GP Fund?
A Co-GP Fund operates much like any other real estate fund except for one important difference: where your role as the investor lies.
As discussed above, in a REIT (or other LP fund) you would invest as a Limited Partner. This allows you to passively invest while the General Partner manages the deal, and the property, along with a host of responsibilities. Because you would be a passive investor, your share of the return is proportionally smaller.
A Co-GP Fund differentiates itself in one very important way: instead of investing in the LP side of the fund, you invest in the GP side except you still will invest as a passive investor. In other words, you invest alongside the GP but are not expected to perform any of the GP’s duties. This fund strategy allows LP investors to sit in a GP position and earn like a GP, but remain 100% passive. Colony Hills Capital is able to return a larger share of profits because of the nature of the Co-GP structure and the higher level of sale proceeds that the GP receives for finding, capitalizing, and operating the deal.
Finally, an investment vehicle that allows investors to receive all the benefits of actively investing in real estate (appreciation, cash flow, and tax depreciation) without the headaches, cost, and managing tenants without having to compromise on returns.
The benefits of investing in a Co-GP Fund
As you can imagine, investing in a Co-GP Fund can provide many benefits to an investor. Here are some we think are most important to consider:
- You can passively earn GP equity returns without assuming any of the GP responsibilities described in the previous page
- Investors can earn a projected return of 2.5x compared to a 1.5x return from a traditional LP
- You’ll invest in a diversified portfolio of multifamily properties, with the added benefit of minimal equity exposure (only 5% – 10% of the equity on property level)
- Projected 20%-25% IRR net to investors and distributions of 8% paid quarterly or accrued on an annually compounding basis
- You can receive tax benefits in the form of depreciation of the property to offset passive income and returns
For these reasons, investing in a Co-GP Fund can be extremely beneficial for those looking to passively invest in real estate. Co-GP Fund opportunities are unique, though they are catching on. Read on to see where you can invest in a Co-GP Fund to reap these benefits.
Ready to invest in a Co-GP Fund? Invest with Colony Hills Capital
If you’re ready to reap the many benefits of investing in a Co-GP Fund then take the next step to invest in the Catalyst Fund III by Colony Hills Capital. Colony Hills Capital has sponsored two multifamily Co-GP Funds, Catalyst Real Estate Fund and Catalyst Real Estate Fund II.
Investors are welcome from September 2023 to February 2025, this is a unique opportunity that you will not want to miss. Learn more about Catalyst Real Estate Fund III and take the next step to join today.