The size of any investment firm is measured by the value of its assets under management, which consist of the investments and available capital that a firm has. For residential real estate firms, these primarily consist of properties and cash. The goal of a firm is to grow its assets under management. Here are some ways a residential real estate firm can do that.
Capital Raise
Capital raises increase the cash portion of an investment firm's assets under management. A capital raise may involve existing firm members or new members providing funds for investing.
A capital raise doesn't provide any return to investors, as the increase in assets comes from their financial contributions. The raise does increase the cash reserves that a firm has to deploy, however, and residential real estate firms need plenty to deploy.
Purchasing residential real estate properties requires making a large lump sum payment at the time of closing, and residential real estate firms need the funds to cover such a payment. The only way a firm can get so much capital initially is by raising it from members.
The reason that members contribute during a capital raise is so that the firm can utilize this capital to further grow its assets in one or more other ways. Other types of asset increases do provide investors with returns.
Lease Payments
While some residential properties may be under development or renovation, properties that aren't in either of these stages are leased to tenants. Most often for residential real estate firms, this involves leasing apartments to residents. A firm might also lease townhomes or condos, or even limited commercial space in mixed-use developments.
Recurring revenue is provided from lease payments from which the expenses of operating a residential property must be deducted. Assuming lease payments exceed expenses, the property has a positive cash flow that results in profits. The monthly profits are added to a firm's cash reserves, thus steadily increasing the firm's assets under management.
Appreciation
Appreciation refers to the increase in the value of assets. It's essential to residential real estate investment firms, for they depend on owned properties going up in value. The annual increase is small, but it becomes a large total amount as it compounds on a six- or seven-figure property.
Before a property is sold, any appreciation is unrealized gains. It becomes realized gains that can then be deployed in other ways once a property sells.
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