Interval Real Estate Funds: A 101 Guide

Real estate is a cornerstone of many portfolios; however, exploring new ways to invest in the sector can be intimidating. Interval real estate funds offer a different approach, providing the potential rewards of property investing without the usual landlord hassles. They’ve been gaining popularity among investors looking to diversify, but what exactly are they?

This post examines the big-picture benefits and considerations of interval real estate funds. We’ll touch on their defining characteristics, compare them to other real estate investments, and walk you through what you need to understand before diving in. By the end, you’ll have the tools to decide whether interval funds align with your goals—and how to get started.

What Are Interval Funds?

Interval funds are a unique form of closed-end fund that schedules regular opportunities to buy back shares from investors. Unlike a traditional open-end mutual fund, which continuously allows investors to buy and sell shares on a daily basis, an interval fund sets specific time frames—often monthly, quarterly, or semiannually—when redemptions can occur. 

This structure can reduce the pressure from short-term market swings and grant managers more flexibility in selecting and managing assets. By locking in capital for a set duration, interval funds can invest in less liquid or long-term opportunities without the need to constantly accommodate investor redemptions.

Understanding Interval Real Estate Funds

Interval real estate funds apply the interval concept to property-focused holdings. They are designed to pool investors’ capital and direct it toward tangible assets like office buildings, shopping centers, or residential properties. At their core, these funds are often viewed as an investment vehicle geared toward generating income and potential appreciation from real estate markets.

Anchored to real estate markets, interval real estate funds can target opportunities needing longer holding periods, from stable commercial developments to emerging residential projects. Their structured approach reduces pressure from daily redemptions, letting managers focus on properties that benefit from steady oversight and strategic improvements. The result is a more measured real estate investing style that still offers periodic liquidity.

Key Features and Mechanics

Interval real estate funds have several moving parts that affect how you buy and hold shares. Below is an introduction that highlights the primary elements you need to look for if you decide this path matches your needs:

Share Pricing and Valuation: The calculation of share prices often revolves around the fund’s net asset value (NAV), determined by appraising the properties and other holdings in the portfolio. This value can shift based on real estate market conditions, rental incomes, and operating expenses.

Investment Minimums and Suitability: Some funds may require larger initial commitments than others, and you’ll want to confirm whether the fund’s profile aligns with your investment strategy. Minimums can vary, but they’re often set to maintain a certain level of investor standards.

Liquidity Windows: Instead of the daily trading you see in other markets, shares are bought back based on the fund’s schedule. This repurchase offer might occur quarterly, semi-annually, or on another set cycle.

Fee Structures: Most interval funds include management fees and other expenses, which can affect returns. You’ll likely see these charges detailed in the prospectus, so it’s helpful to compare costs before committing your money.

Please Note: Minimum investment amounts for interval funds generally range between $10,000 and $25,000. Additionally, interval funds can have expense ratios that go as high as 3%.1 

Comparing Interval Real Estate Funds to Other Real Estate Investments

Direct ownership of property can be rewarding, but it can also come with challenges, such as dealing with tenants, repairs, and financing. You may discover that interval real estate funds address some of these headaches by allowing you to pool your money and rely on professionals to handle property-level concerns.

Real estate investment trusts (REITs) are another common choice for investors. They typically trade on an exchange and are more liquid day to day. However, interval funds may have a different approach to buying and valuing properties, giving them a structure that’s more limited in how often you can access your capital.

Private equity real estate funds commonly come with far more substantial lock-up periods, fees, and minimum investment amounts. However, it can take several years before redeeming shares becomes an option. By contrast, interval funds are usually more affordable and promise a predetermined window for redemptions, though that window might be narrower than you’d find in a fully liquid option like a REIT.

In weighing these possibilities, there are several key factors to consider. These include how much direct control or responsibility you want over the assets, the fees you’re willing to pay for potentially higher returns, the capital you can commit, and how long you can wait for liquidity.

Please note: REITs can come in several different types with varying fees and minimums. REIT mutual funds, for example, often have minimums under $3,000 and expense ratios below 1%. However, public non-traded and private REITs can be similar to interval funds, with $25,000 minimums.2 Additionally, traditional private equity funds can require minimums of $1,000,000+ plus a 2% maintenance fee and 20% performance fee on fund profits. However, alternatives like evergreen private equity funds have become more accessible, with minimum funds being $25,000+ and fees well below the typical “2 and 20” model.3

Potential Benefits of Interval Real Estate Funds

These products can offer a variety of reasons to spark your interest. Consider the core advantages below:

Diversification Opportunities: By entering different property sectors, you can distribute your money across multiple segments. This spreads out risk, especially if the fund invests in varying types of real estate.

Scheduled Liquidity: You don’t get daily redemption, but you still receive periodic windows to exit. Some investors prefer having a predictable schedule rather than relying on immediate transactions. 

Professional Management: Your holdings are overseen by fund managers who specialize in property acquisition, operations, and disposition. Their role is to identify suitable assets and handle day-to-day oversight.

Accessibility for Individual Investors: Unlike some hedge funds that might have steep minimums or be open only to accredited participants, many interval funds are more approachable. You could find an entry point that matches your budget and timeline.

Possibility for Stable Returns: You might be drawn to these funds if you’re looking for steadier performance than more volatile investments. In certain markets, properties can serve as a buffer, though no one can guarantee how they’ll perform.

Risks and Other Considerations

No investment is without drawbacks. When looking at interval real estate funds, keep these points in mind:

Limited Liquidity: Scheduled redemption windows mean you won’t have daily access to your capital. This limited liquidity can be challenging if you need funds on short notice, but it also allows fund managers to commit to longer-term real estate projects with less disruption.

Market and Economic Fluctuations: Property values ebb and flow with economic cycles. Factors like interest rate changes, shifts in tenant demand, or broader economic downturns can influence rental income and property appreciation, affecting the fund’s overall performance.

Fee Implications: Management fees and other charges can reduce your net returns over time. Comparing cost structures among different interval real estate funds helps make sure you’re not sacrificing too much of your potential gains.

Regulatory Changes: New rules or modifications to existing laws can impact how properties are valued or how funds operate. Keeping track of real estate and tax regulations helps you anticipate potential shifts that could affect your investment.

Management or Sponsor Risk: The fund’s success rests on the sponsor’s ability to select and manage properties effectively. A poor track record or ill-considered investments could weaken returns and heighten the overall risk.

Tax Implications: Distributions may include rental income and capital gains, each taxed differently depending on how they’re classified. Ordinary income rates often apply to rental proceeds, while capital gains distributions may qualify for lower tax rates. If part of the payout is a return on capital, your cost basis decreases, which could affect future gains or losses. Holding interval real estate funds in a tax-advantaged account (e.g., an IRA) might defer taxes until withdrawal. State and local rules also vary.

Selecting and Vetting an Interval Real Estate Fund

Understanding which fund to pick involves several checks. Below are some factors you may want to research:

Fund Performance Metrics: Certain funds provide information on their average returns over recent years, allowing you to compare their performance to similar options (though past results are never a promise of future performance).

Management Team Expertise: Look for fund managers who demonstrate a solid background in property acquisition, financing, and upkeep. Their previous successes (or failures) can be a clue about future outcomes.

Fee Structures and Transparency: If you stumble across hidden charges, you may have fewer gains left over. Look for clear disclosures about management fees and additional operating costs.

Reading the Prospectus: This document outlines objectives, approaches, and potential pitfalls. It also explains how shares are valued and what rights you have regarding redemption.

Redemption Policies and Restrictions: Check if the repurchase offer happens quarterly, semi-annually, or on another schedule. This allows you to plan around the timing for share redemptions.

Our Advisory Team Can Help You Invest in Interval Real Estate Funds 

Interval real estate funds bring structure and predictability to property investing while potentially offering the benefits of professional management and diversification. Their set redemption periods and emphasis on real estate investments can offer stability, but they also involve limited liquidity, minimum investment requirements, fees, and other important considerations.

Our financial advisors will help you sift through various interval real estate funds, examining track records, fee structures, and redemption schedules to identify a fund that suits your risk appetite, liquidity needs, and investment timeline. We consider sponsor experience, asset selection, and overall performance to match you with suitable opportunities.

Beyond fund selection, our team integrates interval real estate funds into your broader financial plan. We discuss how these investments could impact your taxes—whether it’s income, capital gains, or deferral strategies in a tax-advantaged account—so you’re clear on potential obligations and opportunities.

If you’re ready to learn more about interval real estate funds, take the first steps, or explore other ways to invest in property, schedule a complimentary consultation today. Our advisors are here to guide you through the evaluation and planning process. We look forward to assisting you on your real estate investing journey!

Resources: 

1. Investopedia
2. NerdWallet
3. Morningstar