Starting a real estate fund means forming a legal entity, qualifying for a federal securities exemption, drafting the offering documents, registering as an investment adviser (or claiming an exemption from registration), arranging a qualified custodian, and filing Form D with the SEC along with any required state notices before you accept your first dollar of outside capital. Here is how to start a real estate fund, step by step, under current federal rules.
The process typically runs several months and depends on coordinated work from securities counsel, a tax adviser, an auditor, and a fund administrator. Costs scale with complexity, but legal fees alone for formation commonly range from $25,000 to $75,000.
Pick the Entity Structure
The entity you form drives liability allocation, tax treatment, and how profits move to investors. For a private real estate fund, the choice is almost always a limited partnership or a limited liability company.
A limited partnership splits the fund into a general partner, who runs operations and carries unlimited personal liability, and limited partners, whose exposure is capped at what they invested.1Legal Information Institute (LII) / Cornell Law School. Limited Partnership Because that unlimited liability is a real problem, the general partner is itself usually an LLC or corporation set up to contain the risk. The LP remains the default for institutional real estate funds because it cleanly separates control from capital.
An LLC protects every member from personal liability. The operating agreement sets profit allocation, voting rights, and management authority. Most fund LLCs are manager-managed rather than member-managed, since investors want returns rather than operational decisions. State filing fees to form an LLC run roughly $35 to $520 depending on where you organize.
A real estate investment trust is a different vehicle and generally not an option for a small private fund. The Internal Revenue Code requires a REIT to have at least 100 beneficial owners, and the REIT must distribute at least 90 percent of its taxable income as dividends each year to keep its tax status.2Office of the Law Revision Counsel. 26 USC 856 – Definition of Real Estate Investment Trust3Office of the Law Revision Counsel. 26 USC 857 – Taxation of Real Estate Investment Trusts and Their Beneficiaries Unless you are building a large, broadly held vehicle, an LP or LLC is the right structure.
Qualify for a Securities Exemption
Every sale of a security must either be registered with the SEC or qualify for an exemption. Full registration is prohibitively expensive for private sponsors, so nearly every private real estate fund relies on Regulation D.4U.S. Securities and Exchange Commission. Exempt Offerings Two rules do most of the work: Rule 506(b) and Rule 506(c).
Rule 506(b): No Advertising
Under Rule 506(b), you can raise an unlimited amount from an unlimited number of accredited investors, plus up to 35 non-accredited investors within any 90-day period, as long as each non-accredited investor is sophisticated enough to evaluate the offering.4U.S. Securities and Exchange Commission. Exempt Offerings You cannot publicly advertise the fund. No social posts, website banners, or mass emails to people you don’t have a pre-existing relationship with. Most sponsors avoid non-accredited investors entirely because including even one triggers additional disclosure requirements.
Rule 506(c): Advertising Allowed, Verification Required
Rule 506(c) lets you market the offering publicly. In exchange, every investor must be a verified accredited investor, and you carry the burden of verification. The SEC accepts several methods: reviewing tax returns or W-2s for income, examining bank and brokerage statements for net worth, or obtaining written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA.5U.S. Securities and Exchange Commission. Assessing Accredited Investors Under Regulation D A simple investor checkbox is not enough.
Who Counts as Accredited
An individual qualifies through income above $200,000 in each of the prior two years ($300,000 with a spouse or spousal equivalent) with the same reasonably expected this year, or net worth above $1 million excluding primary residence.6U.S. Securities and Exchange Commission. Accredited Investors Since 2020, holders of a Series 7, Series 65, or Series 82 license also qualify. Directors, executive officers, and general partners of the fund itself are accredited by default.
Run Bad Actor Checks Early
Rule 506(d) disqualifies an offering from either exemption if the issuer, any director or executive officer, any 20-percent-or-greater equity holder, any promoter, or any compensated solicitor has certain disqualifying events on their record, including securities fraud convictions within the past ten years, court injunctions tied to securities transactions, and some SEC cease-and-desist orders.7U.S. Securities and Exchange Commission. Disqualification of Felons and Other Bad Actors From Rule 506 Offerings and Related Disclosure Requirements The rule reaches anyone involved in selling the offering, not just the sponsor. Run background checks before you take the first commitment.
What a Blown Exemption Costs
If the fund fails to meet the conditions of its Regulation D exemption, investors may have a right of rescission, forcing the fund to return their capital plus interest.8U.S. Securities and Exchange Commission. Consequences of Noncompliance For a fund that has already deployed capital into properties, that is a crisis. The SEC can also pursue civil penalties against the fund and its principals. The failures that trigger this most often are advertising violations under 506(b) and sloppy verification under 506(c).
Draft the Offering Documents
Three documents form the legal spine of a private real estate fund. None are templates you finish over a weekend.
Private Placement Memorandum
The PPM is your disclosure document. It describes the investment strategy, target returns, risk factors, fee structure, and conflicts of interest. Management fees in private real estate funds typically run 1 to 2 percent of assets under management, and sponsors usually earn carried interest once returns exceed a stated threshold. The PPM must disclose property market risks, interest rate exposure, illiquidity, and any conflict between the manager and investors. A risk disclosed in the PPM is far harder for an investor to later claim as a surprise.
Operating or Partnership Agreement
The operating agreement (LLC) or partnership agreement (LP) is the internal rulebook. It governs capital calls, defaults, voting, manager removal, and the distribution waterfall.
A typical waterfall returns contributed capital to investors first, then pays a preferred return of roughly 6 to 8 percent annually before the sponsor shares in profits. A catch-up tier may then direct most of the next distributions to the sponsor until the sponsor’s share reaches parity with the preferred return. Anything above that is split under the carried interest arrangement, commonly 80/20 in favor of investors. These terms are among the most heavily negotiated in any fund.
The agreement also needs real teeth on capital call defaults. Common remedies include forced transfer of the defaulting investor’s interest at a discount or outright forfeiture, withholding future distributions until the shortfall is cured, or reducing the defaulter’s economic interest over time. A missed call during a property acquisition can derail the deal, so the penalties need to actually deter default.
Subscription Agreement
Each investor signs a subscription agreement to commit capital. In it, the investor represents accredited status, acknowledges the risks laid out in the PPM, and commits to a specific dollar amount. For 506(c) offerings, the subscription package should include a section where the investor supplies verification documents or authorizes the fund to obtain them.
Register as an Investment Adviser (or Claim an Exemption)
Managing a private real estate fund usually makes you an investment adviser under federal law. Whether you register with the SEC or your state depends on how much you manage.
At $100 million or more in regulatory assets under management, you generally register with the SEC by filing Form ADV; registration becomes mandatory at $110 million.9U.S. Securities and Exchange Commission. Form ADV – Instructions for Part 1A Below $100 million, you typically register with your state securities regulator. Registration demands detailed disclosure of your business, personnel, fees, and disciplinary history. Once registered, you file an annual updating amendment within 90 days of your fiscal year-end and amend promptly whenever material information changes.
There is a useful carve-out. If you advise only private funds and manage less than $150 million in private fund assets, you may qualify as an exempt reporting adviser.10eCFR. 17 CFR 275.203(m)-1 – Private Fund Adviser Exemption Exempt reporting advisers skip full SEC registration but still file a limited Form ADV and update it annually. For most first-time fund sponsors, this is the path of least resistance.
Meet the Custody Rule
If you are the general partner of a fund LP or the managing member of a fund LLC, the SEC treats you as having custody of investor assets, because those roles let you access the fund’s money. That triggers the custody rule, which requires a qualified custodian (a bank, registered broker-dealer, or registered futures commission merchant) to hold the fund’s assets.11eCFR. 17 CFR 275.206(4)-2 – Custody of Funds or Securities of Clients Investor capital cannot sit in an account under your personal control.
Custody also means a surprise annual examination by an independent public accountant, who shows up without warning and verifies that the fund’s assets match the records. The common alternative, which most real estate funds take because it is operationally simpler, is to distribute audited financial statements to all investors within 120 days of fiscal year-end. Either way, engage an independent auditor before the fund accepts its first contribution.
File Form D and State Notices
Once the first investor is irrevocably committed, you have 15 calendar days to file Form D with the SEC through the EDGAR system. The clock starts on the commitment date, not when funds hit the account. If you have never filed with the SEC, you first need to submit Form ID to get EDGAR access, which takes a few business days.12U.S. Securities and Exchange Commission. Filing a Form D Notice Do this well before your first close.
Form D is a notice filing, not a registration. It identifies the fund and its executives, states which exemption you are using, discloses the total offering size, and reports how much has sold. Amend it promptly for material errors or changes.13eCFR. 17 CFR 239.500 – Form D, Notice of Sales of Securities Under Regulation D
Rule 506 offerings are federally preempted from state registration, but states can still require notice filings, consent to service of process, and fees in every state where your investors reside.14U.S. Securities and Exchange Commission. Frequently Asked Questions and Answers on Form D Most states accept these filings through the Electronic Filing Depository, which lets you batch submissions and payments. Fees range from under $100 to several hundred dollars per state. Missing a state notice does not void the federal exemption, but it can bring state fines and extra regulator attention.
Build Your Team
A fund needs more than a sponsor. Expect to engage the following before launch:
- A fund manager or general partner who sources deals, runs due diligence, decides when to buy and sell, and reports to investors.
- Securities counsel to draft the PPM, operating agreement, and subscription documents, and to handle Form D, blue sky, and adviser filings. Legal fees for fund formation typically range from $25,000 to $75,000.
- A fund administrator to calculate NAV, process capital calls and distributions, and maintain the investor ledger. Independent administration adds credibility with institutional investors.
- An independent auditor to perform annual audits of the fund’s financial statements. These are necessary for custody rule compliance and expected by sophisticated investors.
- A tax adviser to prepare Form 1065 and the Schedule K-1s and to structure the fund around different investor types.
Plan for Ongoing Obligations
Launching is not the finish line. A real estate fund carries continuous obligations for its life.
Partnerships and multi-member LLCs are pass-through entities, so profits and losses flow to each investor on Schedule K-1. The fund files Form 1065 by March 15 for calendar-year partnerships and must deliver K-1s to investors by the same date.15Internal Revenue Service. 2025 Instructions for Form 1065 Late K-1s carry a $340 per-form penalty, which multiplies fast with dozens of investors. Build your tax timeline backward from March.
If your investor base includes retirement accounts, pensions, endowments, or other tax-exempt entities, understand unrelated business taxable income. Income from debt-financed property can generate UBTI inside what the investor assumed was a tax-sheltered account.16Internal Revenue Service. Unrelated Business Income From Debt-Financed Property Under IRC Section 514 Since real estate funds routinely use leverage, this comes up constantly. At minimum, disclose it clearly in the PPM.
Foreign investors trigger the Foreign Investment in Real Property Tax Act. The general withholding rate on dispositions of U.S. real property interests is 15 percent of the amount realized, and when a partnership disposes of U.S. real property, the partnership acts as the withholding agent.17Internal Revenue Service. FIRPTA Withholding Failing to withhold creates liability for the fund, not just the investor. If you plan to take foreign capital, retain international tax counsel before your first close.
Registered and exempt reporting advisers must update Form ADV within 90 days of fiscal year-end and amend promptly for material changes. Form D amendments are required whenever information becomes materially inaccurate.13eCFR. 17 CFR 239.500 – Form D, Notice of Sales of Securities Under Regulation D Annual audited financial statements go out to investors on schedule.
Two newer items are worth tracking. FinCEN has finalized an anti-money laundering rule for registered investment advisers and exempt reporting advisers, including suspicious activity reporting, with the compliance deadline delayed to January 1, 2028.18Federal Register. Delaying the Effective Date of the Anti-Money Laundering/Countering the Financing of Terrorism Program and SAR Filing Requirements Build the AML program now rather than at the deadline. And on beneficial ownership reporting, domestic U.S. entities are currently exempt from FinCEN BOI filings under a March 2025 interim final rule; only entities formed under foreign law and registered to do business in a U.S. state still file.19Financial Crimes Enforcement Network. Frequently Asked Questions If FinCEN narrows that exemption later, revisit your compliance posture.