Real estate vs Fund option Cost Summary?

What are the pros and cons of each option (for a US Citizen)

From what I understand:
Real estate requires initial real estate agent, property tax payments, and possibly tax filings in Portugal (even if you don’t rent your property out) - anyone summarized what all the initial and ongoing costs are for this options?

For Funds, it looks like you have to file US taxes and the funds need to the PFIC compliant, and there are usually entry fees and exit fees - any idea on what the overall costs are here - I know these vary by fund, but just a rough estimate of median fees and other costs (like maybe US CPA costs).

UPDATE: The results of all my research is here

Hi There - I have invested in a Portuguese Fund - costs are normally what you have to pay if at all in the US - I live in the Uk and dont have t pay anyone - I really dont see a reason to pay anyone just because you invested in a fund. The one I did has an investment ticket of 350k Euros with a very small fee built in so I dont pay anything more. YOu can ping me directly and I am happy to chat- I also have asked to get a board seat on the fund to represent investors so I am very comfortable with the fund option

The average fund is charging somewhere between 2-5% for a setup fee, which typically comes out of the 350k - but some charge none. The bank is going to end up charging around 1k/yr fees for holding the shares (something like 15 bips plus some base fees). I haven’t seen exit fees. Fees for handling your PFIC statements just depends on your arrangements with your accountant, no one can quantify that.

Summarized all my research here into a cost model here for all the options I have considered:

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Thanks Jim

Found your sheet very helpfull,
I am very newbie here (1st day), what do u think i should start ?

Hi Jjmz,

your research really helped us a lot in estimating the costs .

i saw so many funds in your sheet .

i am in a stage of finalizing the funds to invest. but didnt find any good fund.

in you sheet i saw to funds where i didnt find any details. can you share some details to get in contact with these fund managers, they are founder and choosen funds.

thank you in advance

I have added the contact points for each of the funds I considered.

Hi again Jim, your info on this board is excellent, thank you for your hard work!

What’s the deal with the fund term for IMGA Ações R? It’s an open ended fund, no?

EDIT: oh I’m a fool, it’s because you set the time to citizenship in the inputs page. Skipped past that on first look!

I think you have done a good comparison/collection of the costs, but in terms of the comparison of the returns and the “total exit value”, I would be careful trying to infer too much here because you have incorporated lots of assumptions.

Putting aside the “catastrophic scenarios”, the funds you listed have very different risk/return profiles. Some have fixed/capped returns (Mercan, Pela Terra), others have variable. Some of the variable returns will be more correlated with stocks (IMGA, BPI), others will be more correlated with real estate (CGA, PT Yield), and others may have relatively little correlation with either (some of the VC/Private Equity funds). The options with the higher projected returns will generally also have higher risk, and of course projected returns are just that… projections.

Looking at the costs/fees and deciding on what type of investment (real estate, VC, public equity, etc.) best fits your situation and desired risk profile is definitely a major part of making an informed decision. So is looking at the specific strategy of a given fund, the track record of the managers, and just being comfortable with the investment. And for those things, collecting the information into one place is definitely helpful.

However, I think it is fooling yourself a bit to think you can project what the returns will be with the precision reflected in the spreadsheet. For example, there are 3 RE funds which all have at least 60% invested in PT real estate, but the assumed returns range from 4% to 8%. What makes these funds really that different to justify this difference in return? There are 5 VC/Private Equity funds with assumed returns from 7%-10%. Of course, everyone would take the 10% fund over the 7% fund, but what makes a 7% fund vs. a 10% fund? The number listed in the marketing materials?

Ultimately, the “total exit value” is just a reflection of what percentage return you assumed, so the ones where you assumed 10% of course come out with the highest total exit value.

That is correct, I am assuming 7 years of time to citizenship as the term for the open ended funds just to create some basic framework for comparison with the more closed ended funds, even though the funds are in fact open and so you could liquidate earlier or later.

Kevin, Very good to point that out. The returns are not to estimate actually what you would get, but to give you a relative sense ACROSS the options the scale of outcomes possible.

Any kind of fund return is always just a projection. That said there are funds that have inherently limited outcomes vs others that do not. And as you said, you pay for the higher upside with higher risk - meaning you could end up closer to the catastrophic scenario with higher likelihood.

That said, my intent was simply to create a framework for me to understand the scale of differences of options (with the understanding that I am paying for higher expected returns with higher risk of those returns materializing).

To answer your question on how I picked the numbers - they are the “promised” returns in each of the funds prospectus/materials or what they told me I should expect in calls with them. How even there, you are always going to get the more conservative marketer and the more salesy marketer, that may undersell or oversell the returns - but I simply took what they are setting as expectations for return as the baseline.

For real estate, I used average real estate returns on Portuguese real estate from Google searches. For open ended funds, again I used average return for the last 10 years or so. For the the other funds, I used their advertised expected returns.

As you pointed out, their advertising does not guarantee results, but it is true that a VC fund - if it does execute as they expect will deliver more returns than a real estate fund (again if it in turn executes as they expect) with inversely corresponding risk profiles. And the intent of the calculations is to simply show a rough scale of that difference, rather than to be numerically accurate on what return to expect. i.e, it is meant to show relative scales, rather than absolute returns, as this is fundamentally a relative decision.

BTW, VC fund returns that is assumed is actually not a great VC fund - if the VC funds in Portugal can return even the performance of the third quartile funds in the US, we should have better returns than what is projected.

Again, I built it to just help me think through it - but the sheet is open to be copied and modified with any other algorithm that makes sense for you or any other user - the raw data from all the prospectuses (or prospectii?) is in the sheet to enable such analysis, and I tried to document the sheet to enable others to use it for their own decision criteria.

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Thanks, Jim, for starting this thread and putting together the google spreadsheet. You put my own to shame. Note I’m a US investor.

I appreciate Kevin’s comments, and definitely understand you are putting together a framework to think about comparisons of funds and assets. I was somewhat surprised that investor-type friends made property investments, but I see the attraction in their simplicity. I’m a little more focused on fees and administrative hassle, so I prefer the fund route. A few thoughts on the Portugese funds I’ve looked at, in addition to others on this thread.

The Portugese “Venture” equity funds look more like US growth equity investments. Speaking from a US background, growth funds tend to be less cyclical in their returns than true venture capital and are less reliant on finding the small number of superstar fund managers. Net, this makes me a bit more comfortable with the Portugese venture equity funds.

I haven’t fully digested the PFIC implications for US investors, but it seems that there are taxes on unrealized capital gains even in the preferred QEF election. Net, I look at this and think I don’t prefer capital gains. Pela Terra stands out to me in terms of its structure for tax efficiency for US investors, because it limits the capital gain to investors to 2% per year. Dividends would cover that tax. Farmland’s risks are also pretty much uncorrelated to the investment assets most of us hold.

Of the funds I’ve been in touch with, I’ll also say I was favorably impressed with the IBERIS Greytech II, but the minimum is high.

I have just started talking with EQTY, which looks like it may be an interesting diversified option, so maybe a single option to satisfy the investment requirement. Generally, I feel like I’ll get better attention if I invest the full 350 in a single fund. I appreciate that I will be getting into the real estate investments at cost basis with the Fund II they just opened. Several of the other available real estate funds would have a new investor buy in at their pre-existing marked up investments; having experience with marks like that, I don’t really trust their assessment of fair value.

As far as the IMGA Acoes Portugal Option goes, I love the idea of a liquid asset if the Portugese Golden Visa ceases to be an attractive route to citizenship, etc… The transparency is also comforting and the companies are legitimate and larger, thus less less likely to zero in the next seven years. I have not yet figured out if this fund would be eligible for a QEF election, so the taxation could be quite high. Still, the liquidity, transparency, and larger companies might be worth it.

My two cents and thanks to everyone on this thread.

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Not really.

The way you need to think about this - from my informed but not authoritative view - is that PFIC is essentially just ensuring that the foreign fund is taxed in a manner consistent with an onshore fund. If the fund realizes capital gains, then those are taxed as capital gains, when realized. If the fund does not realize the cap gains, then there isn’t a taxable event. What they are trying to avoid is mischaracterized taxation. Let’s consider the example of BlueCrow. It owns land and charges rent and earns interest. If there were no PFIC, then you would buy BC at (say) 100/share in 2021, sell it for 150 in 2026, and realize the entire gain as one big long term cap gain. PFIC makes you/them expose all that interest as interest so they can tax you on it as interest in the year earned. But if BC buys land, sits on it for 6 years, and sells it for 20% more, then that gain is a cap gain. Oh, it doesn’t map perfectly of course, but as a broad-brush that’s the idea. Indeed the language of PFIC underneath is basically saying you need to be able to look at the actual books of the fund and interpret their books using US tax standards. (In practice of course you trust the fund to hire someone to do this for you and produce the PFIC statement.)

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Thanks, Jeff. I appreciate the thoughts…I’d potentially taken some comments on taxation of unrealized gains on other threads the wrong way.

Using an open ended fund probably still has some potential issues with realized gains during my holding period depending on how they file. I guess I need to dig deep on that.

Thanks Jeff - I was coming to a similar conclusion, in that non-interest income (true capital gains) of the underlying assets would not be taxed. Good to hear that is your interpretation as well - though I have been told, irrespective of what the PFIC statement issued by the fund, you are ultimately liable for what the actual gains are - so if the fund says it is not taxable gain in a given year, the IRS can beg to differ and you are still liable.

All that said, I think avoiding all gain to not pay taxes may be the wrong optimization. Mercan also offers a no-gain proposition, which I don’t think is all that attractive. Pela Terra does give you minimal (but non-zero) gain, but they do pay out dividend annually (which would be ordinary income in both Portugal and the US) and the annual pay out may cause tax obligations in Portugal as well (at least to the point of having to at least file taxes).

While most “VC” funds in Portugal ARE private equity funds, a couple I found (Indico and Shilling, and to a lesser extent Portugal Gateway) are true VC funds in the US sense of the word. However, unlike US funds, there are no capital calls, and the entire amount is called upfront, and you get “shares” in the fund, which then appreciate along with the underlying assets in the fund.

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There is a very extensive thread on PFIC and other obligations in another thread, look for the PFIC thread from early in the year.

Yes, you are ultimately liable for the accuracy of the PFIC statement.

As for the rest, well, it’s all I guess how you feel about your investments - there’s no right answer.

The tax issues are the same for any offshore investment, which includes any number of tickers that you can easily purchase on TSX from your Schwab account - they seem like regular stocks but because of how they are structured they are actually PFICs and people take on the tax reporting burden unknowingly, and never file correctly because they have no idea in the first place. This is about the same as folks who purchase property in Costa Rica using a CR corporation because that’s sometimes easier, then AirBNB the property - they are suddenly liable under controlled-foreign-corporation rules for a whole shitpile of forms and taxes on that income, and a few end up nailed against a wall as a result.

The line between PE and VC has always been super blurry to me. And some of those funds allow for a capital call, just that there’s no intention, and you don’t have to stand for it, you can just let yourself get diluted.