It can feel a little overwhelming when you’re just starting out in real estate investment. There are a lot of different investment options to consider, terms to learn like real estate private equity, various common acronyms, and a lot of different products and services that seem similar but can actually be quite different.
One of the most common questions about real estate is specifically about private equity, what it does for investors, and why it’s important. In this article, we will help you learn what real estate private equity does, how it’s different from REITs, and some of the key information you need to know before you invest in this type of fund.
What Is A Real Estate Private Equity Fund?
A real estate private equity fund is an investment vehicle that brings together a pool of capital from various investors and purchases real estate assets. The profits earned from the real estate investments are then divided among the investors according to predetermined terms, commonly referred to as the fund’s private placement memorandum.
These real estate funds provide a great way for individuals, organizations and institutions to diversify their real estate portfolio and gain access to investments that may be infeasible or unavailable individually. Additionally, real estate private equity funds can give minority investors access to larger deals than might otherwise be feasible if they were investing on their own.
Ultimately, real estate private equity funds offer great potential, as well as certain risks, which must be carefully considered before investing in one. We’ll get a little more into the risks and advantages of this type of real estate investing further into the article?
How Are Real Estate Private Equity Funds Different From REITs?
REITs (Real Estate Investment Trusts) and private equity funds are both popular investment options for those who want to take advantage of the real estate market. REITs are publicly traded on exchanges, while private equity funds usually accept investment from a group of people or family offices. REITs also offer regular cash dividends, however, private equity funds generally hold onto earnings until an exit point is reached.
Additionally, REIT owners typically have fewer voting rights when it comes to decisions, whereas in private equity funds owners are often expected to offer guidance, strategy and insight that can help guide investments and portfolios. Private equity fund investments also have longer lock-up periods than REITs, meaning investors won’t be able to access capital or income until an agreed upon time frame has lapsed.
Deciding which option fits best with your financial goals should take into account these various differences between REITs and private equity funds as one may work better for you than the other.
What Kind Of Investors Are Real Estate Private Equity Funds Right For?
In general, real estate private equity funds aren’t available to, or interested in, your average investor. These types of funds don’t generally want people to invest using money from their IRA, or other retirement accounts, and they aren’t interested in having a lot of small investors. Oftentimes, there may be yearly salary requirements for investors, or initial investment requirements of $25,000 or more.
Additionally, real estate private equity funds aren’t generally interested in attracting short-term investors. Most funds lock investors into the fund for a certain amount of time before they can withdraw their money, and may also require additional payments on top of the initial investment depending on market conditions, the type of fund, and how the fund is performing.
This means that this type of real estate investment is generally looking for high-value and risk-tolerant investors, who have enough money to commit to the fund long-term. The people running these funds understand that they need a long-term commitment to show investors the full advantage and potential of the fund and that short-term investments don’t usually pay well enough.
How Liquid Are Real Estate Private Equity Funds?
One of the disadvantages of real estate private equity funds is that they are low-liquidity investments. It’s standard practice to lock investment money into the fund for at least six months, and some funds may require longer capital commitment periods. A several year commitment isn’t uncommon, which means that investors need to have enough resources available to make sure they can meet their commitments over that period.
Low liquidity is generally only acceptable for investments that perform well overall, however, which means that real estate private equity funds are generally confident in their ability to provide a return that justifies the inconvenience.
What Kind Of Return Can You Expect From These Funds?
A successful real estate private equity fund can generate returns from between 6-10% annually. Some years will be better than others, of course, and may even go higher than that estimate, but there are also leaner years that may balance out the average.
The good news is that, because these funds are actively managed, they are generally good about communicating with investors to let them know what they are doing, what they are investing in, and how investments are performing throughout the year.
What Kind of Real Estate Do Private Equity Funds Invest In?
Every fund is going to be a little different, but there are some general trends in investment by real estate private equity funds. Some of the most common options are office spaces, large malls and shopping complexes, or multifamily housing complexes.
Really, these funds will invest in whatever seems to offer the best return on investment, based on their expert evaluation of the different markets and trends in real estate performance.
Typically, these funds are looking for two things. The first is that the property has a high value because they have the funding to purchase these properties, and generally have less competition and a greater return than smaller alternatives.
The other, and much more important consideration, is how profitable that property is likely to be in the long term. One of the most common investment strategies for these funds is to hold onto properties and collect the rent generated by the space. Not all funds operate this way, and not all fund acquisitions will use the same strategy, but it’s one of the most common and most consistently profitable options they have.
Advantages and Disadvantages of This Type of Real Estate Investing
There are advantages and disadvantages to any investment type, but when it comes to real estate private equity funds, it’s important to understand the kind of investment you’re making ahead of time. These investments are high commitment, and you’ll likely need to provide additional funds on top of your initial investment in order to stay involved with your chosen fund(s).
So, let’s talk a little more about the advantages and disadvantages of these funds.
The core advantage of investing with this type of fund is the high and relatively consistent returns over time. Many funds offer a 6-10% return on investment annually, which can be a considerable sum depending on the investment.
While the real estate market does fluctuate, it can offer a higher rate of security than your average investment. Investors can generally count on earning consistent dividends from their investments in this kind of fund, which can help stabilize their portfolios if they also divest in more volatile markets.
There are some drawbacks to private equity fund investments. First, funds like this do charge fees. Most private equity funds charge around a 2% management fee, but some may charge more than that or may have several tiers of fees, which can considerably reduce the profit potential of your investment.
Second, this style of investment is at times only available to investors with considerable resources when the investment is more sizeable. These types of high minimum investments, often in the hundreds of thousands of dollars, mean that corporations and retirement funds are often the main investors.
Lastly, these investments can be vulnerable to economic crashes, or irresponsible lending practices at banks. While the funds themselves aren’t in control of the decisions that lead to these crashes, they aren’t immune to the problems that come with economic upheaval, which can be a serious problem for people, funds, and companies with portfolios that depend on the regular income from private equity funds.
Are You Considering Real Estate Private Equity Fund Investing?
If you think that investing in a real estate private equity fund is right for you, but aren’t quite sure, Teifke Real Estate can help.
Schedule an appointment with our experts if you would like to learn more about the available funds you can invest in, or are interested in learning about other kinds of real estate investing. Our team’s methods are proven effective, and we’re happy to help you find not just great investment opportunities, but the right investment opportunities and strategies for your portfolio and investment goals.
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- Real estate private equity: Overview, careers, salaries & interviews. Mergers & Inquisitions. (2022, June 15). Retrieved February 14, 2023, from https://mergersandinquisitions.com/real-estate-private-equity/#:~