Before You Invest in a Real Estate Fund: Returns, Risk, Taxes, and How the Money Works

What Do Accredited Investors Actually Want to Know Before Investing in a Private Real Estate Fund?

If you're evaluating a private real estate fund, you probably have a list of questions you haven't quite figured out how to ask. How does the money actually work? What happens if something goes wrong? Is the sponsor putting their own capital in?

In Episode 38 of the AAA Storage Podcast, Paul Bennett sits in the hot seat and answers the 15 questions he hears most often from investors evaluating Growth Fund 2. No slides, no pitch deck. Just straight answers.

Here's what he covered.

How Does a Ground-Up Development Fund Actually Make Money?

Growth Fund 2 doesn't make money the way most people assume. There are no quarterly distributions. The fund develops self-storage facilities and small-bay industrial parks from the ground up, leases them to 90% + occupancy and sells them. The profit comes from the spread between what it costs to build and what the income stream the stabilized asset produces is worth on the open market.

In development, the yield on cost produces a development spread- the difference between cap rates and yield on cost. It's the core engine of the fund's returns, and it's what separates a development model from one that simply acquires existing properties. For a deeper breakdown of how yield on cost, cap rates, and IRR work together, this episode covers all the math.

Why Develop Ground Up Instead of Just Buying an Existing Facility?

This is one of the most common questions the team gets, and the answer is direct: ground-up development outpaces inflation. Acquiring existing assets generally keeps pace with inflation.

For investors in their 30s, 40s, and 50s who want their capital to grow rather than just hold its value, ground-up development provides returns that outpace inflation and a margin of safety that acquisition strategies don't. If a market shifts and lease-up takes longer than expected, a development deal might return a 12 to 15% IRR instead of a mid-20s IRR. An acquisition deal in the same market scenario has no buffer. It can go negative.

Paul goes deeper on this in Why Invest in Ground-Up Development, including the specific math behind why development builds in a cushion that buying existing assets simply doesn't have.

Is This an Income Investment or a Growth Investment?

Growth.

If you're looking for quarterly checks in the mailbox, this fund is not designed for you. Growth Fund 2 generates what Paul calls lumpy cash flow. Capital goes in, projects are built, and distributions come back as each property is sold, starting around year four and running through year six. The fund's objective is to have everything liquidated and returned to investors by year six, with a conservative outer range of eight years.

What Does the 7% Preferred Return Actually Mean?

This is probably the most misunderstood concept in private real estate fund investing.

The 7% preferred return is not a payment schedule. It is not distributed quarterly. It accrues.

Here is how it works. When a property is sold, investors receive three things in order. First, 100% of their original capital back. Second, a 7% annual return for every year their capital was deployed in that project. Third, their pro rata share of remaining profits. The sponsor receives nothing until investors have received all of the first two.

If a property is held for four years, investors receive their capital back plus an amount equal to 28% of their original investment before the sponsor touches a dollar. That structure is designed as downside protection, not income. In 33 years, AAA Storage has never lost an investor a dollar.

For a full breakdown of how the profit distribution works across all four steps, the waterfall episode explains exactly how it's structured.

When Do I Actually See Money Come Back?

Year four is when the first exits are expected. Growth Fund 2 has 11 projects, started on a rolling schedule over the first 24 months of the fund. Small-bay industrial projects take roughly three to three and a half years from start of construction to stabilization. Self-storage takes about four to four and a half years.

That means the exit timeline runs from year four through year six, sequentially. The math is based on 120 completed projects over 33 years. It's not a projection pulled from a spreadsheet. It's a pattern.

How Do You Decide Whether a Deal Is Worth Doing?

Every project is underwritten twice. The first underwriting happens when the land is purchased. The second happens when the project approaches the end of pre-development, with updated market data, updated cost data, and a fresh set of projections. To pass the second underwriting and be formally assigned to the fund, a project must demonstrate a minimum 20% IRR.

AAA Storage land banks all sites with its own capital before any investor money is involved. The risk of that early development phase sits entirely with the sponsor.

For a detailed look at every factor that goes into the underwriting process, Logan Broyles walks through it start to finish in this episode. It's the most downloaded episode in the show's history.

What Do Family Offices and High Net Worth Investors Look For?

Sophisticated investors are first looking for a fit to their allocation plan. Does this asset class belong in their portfolio? Once that box is checked, they're evaluating the sponsor. Financial stability. Experience. Track record. Reporting quality.

Paul references a line from Van Isley, a family office investor who came on the podcast: if they have to call you to find out how things are going, that's a problem. Proactive communication is a baseline requirement for larger check writers, not a nice-to-have.

The full conversation with Van Isley covers what family offices actually look for and how AAA Storage delivers on those expectations. His story alone is worth the listen.

How Much of Your Own Money Do You Have in This Fund?

AAA Storage is the largest single investor in every offering it has brought to market. In Growth Fund 2 specifically, the current commitment is $6 million, with a plan to grow that to $10.2 million, representing approximately 22% of total fund equity.

As Paul puts it: "We eat our own cooking around here."

Can You Ever Come Back and Ask Me for More Than I Committed?

Not in Growth Fund 2.. It is written into the private placement memorandum and the LLC agreement. Capital calls beyond an investor's original commitment are prohibited. If you commit $100,000, that is your maximum exposure.

Where Does My Capital Actually Go? One Project or the Whole Portfolio?

Your capital goes into the fund, not a single project. As a member in the LLC, you hold a pro rata interest in all 11 assets. If you invest 10% of the total fund, you effectively own 10% of every project. The upside and risk are distributed across the entire portfolio, not concentrated in a single deal.

What Is a Fund of Funds and How Does It Work?

A fund of funds is a structure where a third party raises capital from their own network and invests it into Growth Fund 2 as a single LP. AAA Storage works with a platform called Tribevest to make this compliant and accessible.

Because the fund manager is writing one large check, AAA is able to offer discounted terms. The spread between standard terms and those discounted terms becomes the fund manager's compensation, while their individual investors participate at parity with direct investors. No extra fees. No disadvantage for the end investor.

For someone with a network of accredited investors who know, like, and trust them, this structure creates the possibility of earning around $125,000 for raising a million dollars. The full episode on the fund of funds structure goes much deeper on how it works and when it makes sense.

How Do Tariffs and Rising Construction Costs Affect a Real Estate Fund?

Materials represent about 30% of total project cost for a self-storage facility. The rest is land, soft costs like engineering and architecture, and labor. A 15% increase across all materials, concrete and steel included, translates to roughly a 6% increase in total project cost. That would lower yield on cost from a minimum of 9.5% to approximately 9.1%.

Not ideal. But it doesn't destroy returns. And in an inflationary environment, rising construction costs generally allow for higher rental rates, which pulls yield on cost back toward the original projection. The point: if it costs more to build today, it costs the next developer more to compete tomorrow. In a balanced market, inflation tends to be self-correcting for a development model.

What Is the Tax Story for Investors in a Real Estate Fund?

This is one of the most underappreciated parts of investing in a ground-up development fund.

Growth Fund 2 will claim bonus depreciation on assets placed in service each year. That depreciation flows through to investors as passive losses on their K-1, typically representing somewhere around 35 to 40% of their invested capital.

Most investors cannot use passive losses against W2 income in the year they occur. But they can roll those losses forward. When Growth Fund 2 starts selling properties in year four and generating passive gains, those accumulated losses can be used to offset the gains. The result is that your first exit or two may be effectively tax-free.

Paul is clear that he is not a CPA, and investors should work with their own accountants. But the structure is intentionally built to maximize that benefit.

What Does the Debt Look Like at the Property Level?

All debt in the fund sits at the property level. Each project is financed individually with local or regional banks. Current terms are Wall Street Journal Prime plus zero, on a five to seven year note, with 30 to 36 months of interest-only payments followed by a 25-year amortization schedule.

The sponsor personally guarantees every loan. That is approximately $70 million in personal guarantees across Growth Fund 2. AAA Storage has borrowed and repaid consistently for 33 years, which is why they continue to receive favorable terms.

What Happens If Something Doesn't Go to Plan?

Every project has a 10% construction contingency built into the budget. Monthly projections are tied directly to the accounting system, so variances are visible in real time. Working capital is sized to absorb longer than expected lease-up timelines, which Paul identifies as the most common real-world risk.

In a major shortfall scenario, AAA Storage has the financial capacity to loan money to the fund to keep it operational. They have done this before. Because capital calls are prohibited, this is the backup. The sponsor absorbs the shortfall rather than passing it to investors.

Frequently Asked Questions

What is a preferred return in a real estate fund? A preferred return is a minimum return threshold that investors must receive before the sponsor shares in any profits. In Growth Fund 2, it is 7% per year, accrued annually for the life of each investment and paid at exit, not distributed quarterly.

Is a real estate development fund a good investment for passive income? Not if you need regular cash flow. A ground-up development fund like Growth Fund 2 is a growth-oriented investment. Distributions are event-driven, occurring when properties are sold rather than on a quarterly schedule. Investors seeking regular income are better suited to funds that acquire stabilized, cash-flowing assets.

What is the difference between ground-up development and acquiring existing real estate? Ground-up development creates value by building new assets and selling them at stabilization. Acquiring existing assets generally keeps pace with inflation. Development outpaces it, but carries additional execution risk during construction and lease-up.

How do passive losses work in a real estate fund? Passive losses from depreciation can only offset other passive income or gains, not W2 income. In a development fund, those losses accrue in the early years and can be rolled forward to offset gains at exit, potentially making your first distribution tax-free.

What does no capital call mean for investors? Your original commitment is your maximum financial exposure. The fund cannot return to you and ask for additional capital beyond what you originally agreed to invest.

How long is capital typically locked up in a private real estate fund? In Growth Fund 2, the expected hold period is four to six years, with a conservative outer range of eight years. Distributions begin as properties are sold, starting around year four.

What should I look for in a private real estate fund sponsor? Track record, financial stability, and transparency. Specifically: how long have they been operating, do they invest their own capital alongside investors, how do they communicate when things go sideways, and what does reporting look like between exits.

Ready to Learn More About Growth Fund 2?

AAA Storage hosts live webinars every other week where you can hear Paul walk through the fund in detail and ask questions directly. See upcoming events here.

If you're ready to go further, visit the Growth Fund 2 page to review the details or reach out to schedule a call with Paul.

Learn more about Growth Fund 2