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Investment Fees and the Impact on Investor Returns

Investment Fees and the Impact on Investor Returns

Are Fees Friend or Foe for Your Real Estate Investment?

Investing in real estate can be an amazing way to grow your wealth. However, there are irritating fees subtly hidden in the investments. 

Are they a necessary evil or a sneaky way to shrink your returns?

Today, we will discuss investment fees. We’ll explain what they are, and how they impact your bottom line. We will also show you how to choose an investment partner who prioritizes your profits.

Ready to separate myth from reality and invest with confidence? Let’s go!

Explaining Institutional Fees vs Retail Investor Fees

Institutional investors, such as pension funds, endowments, foundations, and sovereign wealth funds, allocate 8% to 15% of their portfolios to real estate and why wouldn’t they? It offers potentially high and consistent returns and diversification. Plus, because of such institutions’ sheer size and scale, a simple fee structure focused on sponsor compensation primarily through performance-based profit splits of roughly 90:10 (i.e., 90% of total profits go to investors and 10% to the sponsor). Incentivizing performance-based models work best for efficiency purposes and align with investor interests. Additionally, these institutional investors typically fund $5MM to $100MM or more, simplifying the capital stack and overall deal management overhead.

For retail investors making $50k-$1MM investments, accessing the lucrative deals available in the private markets with smaller investment amounts incurs a higher fee burden to compensate the sponsor for the additional overhead and increased costs associated with accommodating a large pool of smaller investors. Typically, retail investors invest in syndications like those offered by RSN and our many market competitors.

So, let’s break down some of these fees.

The Rundown on Standard Fees

  • Transaction Fees: These encompass all costs not directed to the sponsor, including the brokerage fee—a crucial facilitator in property deals, usually amounting to 5% to 6% of the sale price divided between the agents. Additionally, loan fees and closing costs fall under this category, offering a comprehensive view of the financial obligations in real estate transactions.
  • Property Management Fees: Essential for comprehensive understanding, every transaction of notable scale requires an active property manager, incurring a management fee between 4-7%. This fee reflects the responsibility for property oversight proportionate to the property’s scale and managerial effort involved. Depending on the approach, sponsors may externalize the property management function or maintain in-house teams. For smaller properties, the management fee can exceed 10%.

“Other” Fees

It’s here where the fine print bites. Other fees include acquisition, asset management, construction management, equity management, and disposition charges. These fees are typically intended to cover the operating costs of performing these functions and not necessarily be a profit center for sponsors. That said, this is the stealth zone for extra costs that don’t always catch the eye upfront but significantly affect the bottom line. It’s here where the sneakiness happens and where sponsors make their mark. More on this later…

Performance-Based Splits

Here is where sponsors should make their profits by putting together and executing successful deals. Upon exit, when there are profits to be had, it’s fair for sponsors to reap the rewards of their labor and align investor outcomes with sponsor outcomes. Typically, a preferred return of 7-8% goes to investors, with any profits above this split between investors and the sponsor.

Institutional Standard Splits: Closer to 90:10, indicating a higher share for investors. I.e., 90% of profits go to investors and 10% to the sponsor. For “single check writers” or substantial investments (e.g., $10MM), a 90:10 split is common.

Syndicated Deal Splits: Typically ranging from 70:30 to 80:20, adjusting based on deal structure and investor contribution. For contributions of around $50-500k, splits adjust to 70:30, with larger investments skewing closer to 80:20 or higher.

Overview of institutional fees

Institutional investors play by different fee rules than retail investors. With massive portfolios and in-house management teams, they can leverage economies of scale for lower fee structures overall. Consider the following institutional-level fee structure:

Overview of institutional fees

Private Market Investments: A Smaller Investor’s Perspective

As mentioned earlier, accessing private markets as a smaller investor often means facing higher fees than institutional investors. So stay aware of these fees and their impact on your returns.

Real Estate Syndication Models, Fees, and RSN’s Role

Real estate syndication takes a different approach by bringing investors together and pooling their resources to buy and manage properties. A sponsor, or syndicator, orchestrates operations while passive investors inject the equity. It’s a world where collaboration meets savvy investment strategies but not without financial complexities. Many fees often tag along in these partnerships, giving syndicators the dubious industry distinction of being “fee machines.”

But when we unpack the narrative in further detail, we’ll show how RSN Property Group bucks this narrative with a more investor-friendly approach.

Peeking Behind the Curtain: Syndication Fees

This derogatory label, “fee machine,” is due to the many fees that compensate the syndicator for services from acquisition to management being taken overboard and used as a profit center rather than covering operational costs. Some are ongoing, many are one-off payments, and could include the following:

  • Acquisition Fee
  • Asset Management Fee
  • Equity Management Fee
  • Loan Guarantor Fee
  • Construction Management Fee
  • Refinance Fee
  • Disposition Fee

A steep acquisition fee, for example, can increase the initial investment, making some investors hesitant to pay the higher upfront cost. Beyond the impact on initial outlays, these fees can also influence overall investment returns. While there’s a fear fees might nibble away at profits, the absence of a well-structured incentive model poses a more significant threat to asset performance. Moreover, fee structures can sometimes encourage less-than-ideal behaviors from syndicators, like premature property sales or over-leveraging, which increases the risk.

RSN Property Group’s Fee Philosophy

At RSN Property Group, we’re determined to dispel the myth that all syndicators are mere “fee machines” while highlighting the topic to protect investors and encourage them to look deeper into fee structures and sponsor incentives when allocating their investment dollars. Against the backdrop of fee-heavy syndication models, we take a balanced approach, align our fee structure with investor interests, and focus on the long-term success of our properties. Here’s how we do things differently:

  • Acquisition Fee: We’re proud of our modest 2% fee. It’s a competitive edge that lowers the barrier to entry for investors and reflects our commitment to putting properties — not fees — first. It also genuinely covers acquisition costs. As we always say, we only really make money on the back-end split when the deal exits successfully.
  • Asset Management Fee: Like the acquisition fee, we only use this fee to keep operations running, to ensure we are adequately supervising our property management team and handling all other asset management functions outside of their scope of duty. We charge 2% of revenue.
  • Construction Management Fee: Again, we only use this fee to keep the lights on as we manage all value-add construction efforts, our GC, suppliers, and more. We charge 5% of the capital spent on these efforts.
  • Property Management Fee: By outsourcing this service, we not only cap the fee at 3% but also guarantee each property receives top-notch care from local industry experts with proven track records without breaking the bank. Considering the industry’s average hovers around 8.49%, our approach offers significant savings and operational advantages.
  • Investor-Centric Structure: Every decision we make is to maximize returns for our investors and inherently drive our own success. Our efforts in renovating and repositioning properties have consistently delivered actual returns averaging above 20% annually over nearly a decade.

Comparative Fee Analysis

We can talk about our approach all we want, but talk is cheap. So, let the numbers do the talking. Take a side-by-side look at our fee structures, and you’ll immediately see why RSN stands out. We’ve strategically aligned our success with yours with lower acquisition fees, lean management costs, and innovative property management outsourcing. No smoke and mirrors – just a radically transparent, investor-first approach to help your money work smarter compared to other sponsors.

Comparative Fee Analysis

Total Fee Burden

These fees can be mysterious and confusing. They all seem low in terms of percentage values, they’re seldom defined, and often, they’re not even mentioned in marketing materials but hidden deep in lengthy PDF offering documents.

So, let’s see this laid out clearly.

Below is a breakdown assuming a $40MM purchase price using $20MM in equity and a sale at five years of $60MM, reflecting 2x equity multiple before fees, preferred returns, and profit splits. This is a highly simplified example meant to illustrate the concept rather than be a perfect model. Additionally, some fee numbers have been slightly adjusted to obfuscate the sources, as our goal is to educate investors rather than disparage specific competitors.

Total Fee Burden

Total impact on investor returns

The first thing to understand is that these fees are paid to the sponsor before any preferred returns are paid to investors. Additionally, while some performance is tied to these fees, they are also paid out to sponsors before the performance-based profit split. This essentially guarantees sponsor profits before splitting what’s left with investors.

In the above examples, investors in a non-RSN deal would see $1.73MM-$2.67MM taken out of the overall returns before they start to see their share. This gets split over perhaps as many as 200 investors, so the impact is less notable to each investor. However, when levied on a large number of investors, it adds up quickly for sponsors.

The obvious defense of this argument is that these higher fees are invested in the management of the properties to drive higher returns for investors. Unfortunately, as you’ll see in a subsequent article, that is not the reality of the situation—higher fees inherently mean more profit for sponsors and less for investors.

Wrapping Up: Investment Fees and Investor Returns

At RSN, we understand the concerns about syndication fees. However, we’ve cut through the noise. We have established a fine-tuned model that puts your interests first. Our process blends the strategic mindset of institutional giants with an investor-friendly approach that works for the syndication arena. We sleep better at night knowing our successes are your successes.

Transparency is key. We have carefully crafted a fee structure that aligns with your success. RSN proudly features lower acquisition fees, leaner management costs, and innovative outsourcing strategies.

The result? More money in your pocket. 

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