If you are an investor in the real estate market, it can often be tempting to expand your portfolio in a variety of other investment opportunities besides real estate. The option of investing in private equity in real estate is one you may want to consider if you are an accredited investor.
In the investment world, private equity real estate is booming and in recent years, the private equity real estate structure has become increasingly attractive to investors due to its many benefits.
Private equity real estate now allows people to diversify their portfolios by investing in large commercial real estate deals they would otherwise not have access to. Additionally, using one fund can be a more effective method of investing in a broad range of assets rather than simply focusing on one or a few commercial deals.
Table of Contents
Typically, private equity real estate consists of putting together a pool of funds, mainly from institutional investors, and utilizing them to invest in public and private commercial property.
However, keep in mind that it is simply not possible for institutional investors to evaluate every single real estate deal worthy of their investment with hundreds of millions or billions of dollars at stake.
An investment vehicle that raises equity for real estate investment is a real estate private equity structure. General partners (GPs), also known as sponsors, create funds. Limited partners (LPs) invest equity in the partnership at the request of the sponsor. Investments in real estate development and acquisition will be made with the funds and money borrowed from banks and other lenders.
Investors who choose to invest in a sponsor-sponsored offering are LPs who generally provide the bulk of equity capital. A preferred return on capital invested is earned by LPs early in the investment process.
There are a number of companies that sponsor real estate funds and provide some of the equity capital. They also secure the investments, manage the investments and collect fees based on the performance of the fund.
In spite of the similarities between private equity funds and real estate investment trusts (REITs), these two investments have some key differences. A private real estate fund often requires that its contributions be held for several years—unlike REIT investments, which are highly liquid because of being a public company.
Another difference between private equity and public REITs is the degree to which private equity in real estate funds is regulated. The strict requirements and oversight for REITs are different from that for private equity funds.
Investing in real estate through private equity is limited for this reason. This contrasts with REITs, which allow investors to purchase or sell shares through a brokerage account.
The amount of capital raised by REITs can vary continuously, while the amount raised by funds is often limited, on the basis of a predetermined fundraising goal outlined in advance and a deadline for accepting funds.
Private equity real estate investments are best known for their returns, as you might imagine. A portion of the profits and income from each underlying investment is entitled to private equity investors—as a result of their investment.
With that amount of pooled capital, these firms can often purchase high-quality investments, yielding substantial returns.
An investment in commercial real estate through a private equity company can provide passive income without the hassle of managing it for investors seeking to earn passively.
There are many advantages to partnering with commercial real estate private equity, these include:
The network, tools, technology, and expertise of a private equity firm's commercial real estate team can be utilized by accredited investors to find profitable investments.
A commercial real estate partnership, by definition, owns assets that are rented to other businesses, so the income generated by the partnership can be used to fund its investment activities.
People who invest in underlying assets are entitled to a portion of the profits and income generated by the asset. This results in a steady flow of dividend income for the individual as a consequence of the investment.
Commercial real estate partnerships with private equity typically have return structures designed to align manager and investor financial incentives. Managers are usually restricted from accessing property income until investors have received a certain return on their investment, which is called a preferred return.
Tax efficiency is a major benefit of private real estate partnerships over public ones. Individual investors benefit from tax-saving strategies, such as depreciation and cost segregation, by allowing them to deduct their losses from their taxable income, reducing their tax bill and increasing their profits.
For accredited investors, there are several different types of private equity funds to consider if you're thinking of private equity investment, these are:
For those who are risk averse, core funds are a good option. Multifamily properties, such as fully-leased multifamily properties, tend to be investments in these funds.
Despite their predictable cash flow, they are usually low risk, so they offer lower returns. Compared to appreciation, it provides a high annual income return.
There is also a type of fund called core plus that combines core properties with value-added properties. Whenever this occurs, they typically offer slightly higher returns in exchange for a slightly higher level of risk being accepted by their investors.
Value-added activities and location enhancements are required for these properties.
When the real estate market is doing well, a value-added fund manager purchases properties to redevelop them and then sell them. A medium-to-high level of risk is typically involved with investing in this type of fund, but greater returns are possible.
Among the assets in these funds are those that have been re-leased, have been made more efficient, or have been renovated—they also contain new developments. Leverage reaches 70% in some cases.
Value-added opportunities are more important than market or location. Investment returns are significantly influenced by appreciation.
The highest potential returns can be found in opportunistic funds, but taking on the most risk is also required. Investing in underperforming markets or undeveloped land is a common strategy of these funds.
There is a high risk/return associated with these funds. Redevelopments in this area involve repositioning and renovating buildings that are in poor condition, vacant, or obsolete as well as building net new buildings on vacant sites.
Opportunity takes precedence over market/location. A significant portion of the returns is generated at the end of the holding period as a result of appreciation.
When it comes to starting a private equity real estate fund structure, you need to consider a lot of factors. To be sure you understand the benefits and risks of this option, it would be best if you spoke with a financial advisor.
Furthermore, before contributing to any fund, you should do some research on it first. The cost structure and investment structure of each fund should be understandable to you. You can only determine if an investment is right for you and your portfolio once you have a full understanding of how it works.
Our team can help, email us at general@saintinvestment.com or contact us at 949-881-7128 at Saint Investment Group today!
Private real estate equity is distinct from conventional real estate investment opportunities in a number of respects.
Private real estate equity is a kind of alternative investment involving the pooling of cash from various investors for the purchase and management of real estate holdings.
Other real estate investment opportunities, such as REITs or individual rental properties, may have a different structure.
Accessibility: Private real estate equity investments are normally accessible only to authorized investors who fulfill specified income and net worth criteria.
Other investment choices in real estate, such as REITs, may be more accessible to a broader spectrum of investors.
Private real estate equity investments often need a more active role in property administration and decision-making than other real estate investment choices, such as REITs.
Private real estate equity investments might potentially give greater profits than conventional real estate investment choices, but they also involve a greater amount of risk.
Having greater direct control over property management and the capacity to reap benefits from the appreciation of the underlying assets increases the possibility for better returns.
Diversity: Private real estate equity investments enable investors to diversify their portfolios with a variety of properties across various markets and asset classes, providing greater diversification than other real estate investment choices, such as individual rental properties.
Among the dangers connected with private real estate equity investments are the following:
Real estate market circumstances may fluctuate, resulting in changes to property prices and rental revenue.
This may have an impact on the value of your investment and your capacity to generate profits.
Private real estate equity investments sometimes demand a hands-on approach to property management, which may be time-consuming and calls for particular expertise and abilities.
Ineffective property management can result in decreased returns and higher expenses.
Private real estate equity investments are often illiquid, which means it might be difficult to sell your stake fast and you may have to accept a lesser price.
Regulatory risk: Changes in government laws and taxes can have a substantial influence on real estate assets and reduce their value.
Important to the profitability of real estate investments is the capacity of tenants to pay rent on time and in full.
Credit risk emerges when renters are unable to satisfy their commitments, resulting in a decrease in rental revenue and possible increases in property management expenses.
Changes in interest rates can have an influence on the cost of borrowing and the value of your investment.
Returns from private real estate equity investments can vary and are dependent on several factors. It is not possible to predict exact returns, however, private real estate equity investments have historically offered higher returns compared to other traditional investments like bonds and stocks. These returns come from rental income, property appreciation, and property sales.
Keep in mind that real estate investing is volatile and there is no guarantee of returns. Additionally, private real estate equity investments are typically long-term investments with a holding period of several years, so returns may not be realized for a while. Before making a decision, it is important to research private real estate equity investments and understand their potential risks and rewards. It is also recommended to consult with a financial advisor to determine if this type of investment aligns with your investment goals and risk tolerance.
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.
