Finance

Closed real estate funds: return and risk

If investors want to invest in real estate, they quickly come across closed-end funds. These sometimes attract with high yields. What they conceal: a high risk – and not only that.

In large cities in particular, more and more high-rise buildings are springing up: office buildings, huge residential complexes, hotels, and sometimes even entire senior citizens’ residences.

The general rule is: As a private investor, you can benefit from the construction of such properties – even without commissioning or even paying for it. What is needed for this is a so-called Real estate funds.

Figuratively speaking, you can think of it as money baskets that invest your money in real estate. If these are rented out or if their value increases, you as an investor benefit from the growing value of the fund.

However, so-called closed real estate funds. Because these attract with high yields. But the risk is also very high – and there are even more disadvantages. t-online.de explains what exactly is behind it.

What are closed real estate funds?

In order to clarify what a closed real estate fund is, you should first know exactly what a real estate fund actually is.

A Real estate funds is an investment fund that invests money from investors in real estate, i.e. apartment buildings, senior citizens’ residences or office buildings. You can, in turn, invest your money in real estate funds. So if the price of the properties in which the fund invests goes up, you profit.

Most real estate funds invest their money in a variety of different buildings – spreading the risk of losing money with the fund. You can invest in these funds on an ongoing basis. That’s why these mutual funds are also called open real estate funds (see below).

With closed funds you become an entrepreneur

But there are also so-called closed real estate funds. The principle is different with these: These funds usually only invest the money in one property, for example an office complex.

To do this, you set up a company specifically. You then become co-owner of this when you invest your money in a closed fund. So that’s how you become an entrepreneur (see below).

As soon as enough money is available for the financing, the fund will be closed – and you as the investor will usually not be able to withdraw your money for the next ten to 30 years. For this reason, shares in closed real estate funds cannot be traded on the stock exchange.

Why are closed real estate funds so risky?

The reason is obvious: Because closed-end real estate funds only invest in one property and investors cannot withdraw their money, they are very risky.

If you buy a share of a closed real estate fund, you practically become an entrepreneur – you participate directly in the profits, but also in losses. Because it is possible that apartments cannot be rented out as planned, a hotel does not open or an office complex is not even completed.

Your assets with which you participate in the closed-end fund are not separated from the fund assets. That means: If the project doesn’t work out, you risk a high loss. It looks different with open funds: Here the Personal-Financial.com Investment Code (KAGB) regulates that your capital as Special fund is safe in the event of the fund company going bankrupt.

It depends on the exact legal form of the closed real estate fund, how high your loss is:

  • Closed real estate funds are mostly used by fund companies as Limited partnership (KG) – then you become a so-called limited partner. This is liable to a maximum of his participation, i.e. the money invested.
  • But it can also be that a closed real estate fund as Open trading company (OHG) or Civil Law Society (GbR) is founded. In this case, in the event of bankruptcy, you are not only liable with your participation – but also with your private assets.

What other disadvantages do closed real estate funds have?

In addition to the high risk, closed-end real estate funds usually require you to invest a certain amount. This minimum amount often starts at 5,000 euros, but it can also be significantly higher.

In addition, the costs of closed real estate funds are sometimes very high: often 15 to 20 percent of the investment amount. At 15,000 euros, 20 percent would be 3,000 euros – so in the end you would only invest 12,000 euros. The rest is on the cost.

In addition, the term of closed real estate funds is very long – often ten to even 30 years. You cannot return your share in the real estate fund to the fund company before this period has expired.

Basically, when it comes to investing, you tend to let your money work for you for longer rather than shorter periods. But if you can’t withdraw your money all the time, there is an additional risk.

If you still decide to invest, you should look to the Warning list from Stiftung Warentest watch. There you will find those funds that are very risky or dubious – including certain closed-end real estate funds. You should therefore refrain from investing in these funds. The warning list costs 2.50 euros and you can use it here on the website of Stiftung Warentest download.

What advantages can closed real estate funds offer?

Many providers advertise high returns, called returns, which an investment in closed-end real estate funds can bring. Often there is talk of more than five percent per year, sometimes even well over ten percent.

But beware: High returns always go hand in hand with high risk. In addition, you may not get the full return because the costs of investing in closed-end real estate funds are so high (see above). You should therefore consider very carefully whether you want to invest in a closed real estate fund. Instead, you can also invest your money in an open real estate fund (see below).

In the case of closed real estate funds, you can also expect a regular distribution – for example, if a property is rented out. These payments can also be beneficial. But they are usually not guaranteed – in other words, if apartments are vacant, the distribution is also lost.

Transparency is often cited as an advantage of closed real estate funds. The reason: The fund invests in just one investment property – unlike an open real estate fund that invests in numerous houses.

But even if you know which property the fund is investing in, that in no way means that you are protected from the possible risks of the investment. As a general rule, the more diversified an investment is, the more secure it is.

Can I terminate a closed real estate fund?

As a rule, you cannot return or sell the shares you have bought in a closed real estate fund to the fund company – at least not via the conventional route on the stock exchange, for example. Instead, you have to keep it for the duration of the term – sometimes up to 30 years.

However, you can sell a fund unit via the so-called Secondary market on the Internet. But here as a seller you have no comparative values ​​- depending on the situation, you are selling your share well below value. Sometimes you have to expect high price discounts anyway. After all, it is your only option to sell the fund share – and a potential buyer knows that.

You may even still have to pay in, so Additional payment obligations to have. Overall, one can say: You should think twice about selling on the secondary market.

You may be able to terminate a closed real estate fund

In certain cases, however, you can cancel or reverse a closed real estate fund. To do this, however, you have to prove, for example, that you have given incorrect advice and that you have not been properly informed about the risks. Sometimes, however, a termination is only possible within a certain period of time – after that no more.

In addition, if you cancel, you may still have payment obligations, i.e. you still have to pay money into the fund. In this case, it may make more sense to hold a closed real estate fund until the end of the term. You should definitely seek independent advice – for example from a lawyer.

Open or closed real estate funds? What is the difference?

Open-ended real estate funds are definitely the better investment for you as an investor. The reason lies in a different risk:

  • Open real estate funds invest your money mainly in hotels, shopping centers and office buildings. You can invest in these funds continuously and with smaller sums.
    Since open real estate funds invest in many different properties, the risk is broadly diversified. For example, if a building cannot be rented out, that doesn’t matter too much. You can usually invest in open real estate funds with sums from 50 or 100 euros.
  • It looks different with closed real estate fund out. Investors only have a stake in a few or even in a single property. In contrast to open-ended real estate funds, you can usually only enter closed real estate funds with a sum of 5,000 euros or more. As soon as enough money is raised, the fund will be closed. Then you cannot invest any further.

Another disadvantage: The money is usually fixed for five to ten years – and you won’t get it. The problem: Since a closed fund often only invests in one property, for example an office building, this increases the risk for you as an investor. If the price of this building falls or tenants cannot be found, you as an investor will be immediately hit.

We hang on to: Closed real estate funds are not particularly suitable for private investors. The risk is too high and the costs may eat up the return. However, open-ended real estate funds can also be an option for inexperienced private investors if they want to participate in the real estate boom.

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