Investors are always looking for new opportunities to build wealth. This is especially true when it comes to opportunities that allow them to build wealth passively. That’s why investing in private equity real estate is quickly becoming the newest frontier in the world of real estate investing.
What is Private Equity Real Estate?
Private equity real estate investing involves a group of investors putting capital into a fund to acquire real estate assets and then selling them off quickly after the assets appreciate. Private equity real estate funds can be used to buy land and then develop an asset from the ground up or find undervalued assets and increase revenue through a combination of remodeling, improving management and increasing rents.
Real estate developers are increasingly turning to private equity to fund deals. Private equity can be used to fund the down payment on a project when traditional financing is being used to fund the rest. It can also be used to completely finance a deal when the project doesn’t meet the criteria of a traditional lender.
Most traditional banks only finance real estate deals under certain circumstances. When it comes to a preexisting or already built asset, such as an underperforming or poorly managed apartment building, banks don’t like making loans secured by properties with low occupancy rates and may only be willing to finance a smaller portion of the deal. Investors bet on upside; banks typically don’t.
The type of value-add opportunities with the most upside usually carry too much risk for banks to finance at the same loan-to-value as stabilized properties. If they do, the interest rate will likely be much higher and debt service will eat up profit.
The same thing holds true on development projects built from the ground up. They only have a pro-forma budget that forecasts what revenue the asset will generate, but the asset still has no track record of performance.
The cost of developing assets like retail properties, office buildings and industrial parks converged with tight lending standards to create a gap between developers and the capital they need to do deals. Increasingly, private equity real estate funds are bridging that gap. Developers and project sponsors trade equity for capital and minimize the amount of money they have to borrow.
Traditionally, access to private equity funding opportunities has been limited to institutional investors like hedge funds, mutual funds or private real estate investment trusts (REITs). However, the traditional private equity model has been turned on its head. The advent of real estate crowdfunding platforms and the fact that there are more real estate opportunities than there are funds looking to finance them has opened the private equity world to a whole new group of investors.
What’s the Difference Between Private Equity Real Estate Investing and REITs?
You might think a private equity real estate fund sounds a lot like a real estate investment trust, and you’re right. The basic structure and the business model of real estate private equity funds and REITs are similar. Private investors contribute money in exchange for equity in real estate with the goal of generating income and diversifying their portfolios.
Investors usually become limited Class B partners in a limited liability company (LLC) or limited partners in a real estate limited partnership. They take a back seat to their fund’s general partner (or managing member), who manages assets on a day-to-day basis and receives distributions based on income the asset generates. At their core, both REITs and private equity funds are passive investments where investors get direct equity without making management decisions.
If the asset appreciates, both the private equity fund and the REIT will sell it off, which produces profit for the investors. However, there are significant differences between investing in a private equity real estate fund and a REIT. Chief among them is the fact that most REITs are publicly traded, which offers shareholders higher liquidity. By contrast, exiting a private equity real estate deal early (or without penalty) is almost impossible.
Second, and perhaps more importantly, is the minimum investments. Although there are numerous publicly traded REITs open to virtually any investors, private equity funds are almost exclusively available to accredited investors. Because private equity real estate funds try to buy assets and move them in short time periods, they typically have buy-ins in the low to mid six-figure range. Publicly traded REITs, by contrast, have share prices ranging from $5 to $500 and non-traded REITs typically have buy-ins ranging from $1,000 to $5,000.
If you were to imagine REITs and private equity real estate offerings as luxury cars, a REIT would be a Lexus, while a private equity fund would be a Bently or Rolls Royce. They’re both luxury cars, but one of them is in an entirely different stratosphere when it comes to price and accessibility.
Pros of Private Equity Real Estate Investing
The most tangible and obvious benefit of private equity real estate for individual investors is the upside. If you can afford the buy-ins, you not only have direct ownership of the asset (proportional to your equity share), you participate fully in the profits generated by the asset. The size of your buy-in only increases the potential returns.
If your private equity fund manager chooses quality assets and manages them effectively, you can reap incredible profits in a short time period on private equity deals. As long as the fund holds the asset for more than one year, your capital gains exposure is limited, or you can defer your tax exposure by investing with a self-directed IRA. In the meantime, you’ll have access to passive income.
Additionally, private equity funds are usually highly diversified across several types of properties in different asset classes. Along with the upside potential and passive income, the investor can get equity in a number of different assets for a low price in comparison to scouting them out and buying them individually.
Cons of Private Equity Real Estate Investing
Private real estate investing is not without downsides. This is true of any investment, but you should do a lot of thinking before you buy into a private equity fund. The biggest potential downsides are buy-in costs and illiquidity. Although the hold period on a private equity real estate fund offering may be shorter than some REITs, you’re still pledging hundreds of thousands of dollars to the deal.
Because it’s a private investment, the secondary market in equity funds will be limited — if it exists at all. Getting out of a private equity deal early is basically impossible. Once you’re in, you’re in. It’s also important to realize your initial investment may not be the only time you have to put money in.
Many private real estate investment funds raise money on an as-needed basis, which means they could hit you up for more capital after your initial investment. This is known as a capital call, and some private funds call for investors to make extra contributions when necessary. The request is not optional. If you miss a capital call, you could lose your entire investment without seeing any gains.
Another potential con of private equity real estate investing is fees. Private equity real estate investment funds have very little regulation or oversight, and there is no statutory limit on investor fees. While most funds charge a management fee for overseeing the asset, that may not necessarily be the limit of your out-of-pocket costs. Review your investment agreement carefully before pledging funds.
What Types of Private Equity Real Estate Funds Are There?
Most private equity real estate funds fall into one of the four following categories:
- Core: Of the four categories, core funds usually carry the lowest risk level. Core funds focus on Class A assets with stable tenant bases and a high resale value. Examples of core investments would be fully leased luxury apartment buildings or office parks in premium real estate markets. Core funds typically offer solid, stable returns, but because they are already fully leased and in premium markets, there is less upside.
- Value add: Value add funds look for properties with rental upside and unrealized revenue streams. The assets in value-add funds are usually directly overseen by the fund manager or general partner. They typically require an injection of capital for remodeling and upgrades with an eye on increasing rents and the asset’s overall value. Value-add funds usually have medium to high revenue potential but also carry comparatively more risk than core funds.
- Core plus: Core plus funds offer a combination of core assets and value-add assets to give investors the best of both worlds when it comes to upside and risk. They offer higher returns than core funds but lower than value add. The extra upside in the investment also elevates the risk profile, but it usually carries less risk than value-add funds.
- Opportunistic: Opportunistic funds look for the highest risk opportunities because they offer the highest potential upside. Examples of opportunistic fund opportunities include building from the ground up and underperforming properties in markets that have yet to emerge but are showing early signs of a rebound. If the assets hit their pro-forma targets, investors will reap huge profits from having added tremendous value to assets that were purchased relatively cheaply.
Benzinga’s Best Private Equity Real Estate Investments
If you’re interested in private equity real estate investing but aren’t sure where to look for opportunities, you’re in luck. Check out Benzinga’s favorite private equity real estate investment platforms.
securely through CityVest’s
Disclosure: Must be accredited investing a minimum of $25,000.
CityVest is a web-based real estate investment platform that was established to give small-to-medium-sized investors access to real estate investment opportunities that typically require 6-figure minimum investments. CityVest does this by pooling multiple investor contributions into 1 bundle large enough to satisfy the minimum investment requirements of the best institutional private equity real estate investment funds.
- Individual investors seeking access to institutional investments
- Experienced investors looking to diversify their portfolio
- Investors seeking investments with strong due diligence and screening
- Access to high-performance institutional funds
- High returns
- Intense vetting of investment opportunities
- Third-party due diligence on all funds
- No registration needed to review investment opportunities
- Quarterly distributions
- Only available to accredited investors
- Not a lot of investor control of fund options
securely through RealtyMogul’s
Vary based on investment type
This unique online platform enables investors to handle the entire commercial real estate investing process right from their RealtyMogul dashboard. With rigorously vetted property listings, expertly managed REITs, and a commitment to providing top-notch service and support to its members, RealtyMogul makes commercial real estate accessible to everyday investors.
- Newer accredited investors who want access to pre-vetted properties
- Non-accredited investors seeking consistent cash flow from well-managed REITs
- Experienced real estate investors who want access to deal-specific information that allows them to perform their own due diligence more easily.
- Do everything from finding the investment property through to signing the legal documents and monitoring your portfolio, all in one platform.
- All properties are pre-vetted through RealtyMogul’s transparent and rigorous due diligence process.
- Investment minimums as low as $5,000
- Keep track of investments with regular updates posted directly to your dashboard
- Automated investing
- Individual property marketplace is only open to accredited investors
- Does not offer portfolio management
securely through CrowdStreet’s
Crowdstreet is an online real estate investment platform that lets investors choose from a wide range of real estate investment offerings to crowdfund. Crowdstreet investors are free to buy into managed funds, individual buildings or even build a bespoke investment portfolio that includes both kinds of deals.
CrowdStreet’s platform has a diverse range of property types, ranging from multifamily to office, industrial, self-storage and others.
- Accredited investors
- Long-term investors
- Investors looking to diversify from stocks
- User-friendly interface
- Diverse investment offerings
- Great investor resources
- Proven performance history
- Many offerings eligible for inclusion in self-directed IRA
- Accredited investors only
- Most offerings require a $25,000 minimum investment
securely through RealCrowd’s
RealCrowd is an online real estate investment platform geared towards commercial real estate investing. The platform’s mission is as simple as it is audacious: to create a platform that puts investors in the driver’s seat, while at the same time giving them access to the kind of commercial offerings that traditionally have prohibitively high buy-ins.
RealCrowd does this by leveraging the power of high technology and crowdfunding. Learn more about its real estate investment now.
- Accredited investors
- Long-term investors
- Holders of self-directed individual retirement accounts (IRAs)
- Equity offerings in commercial real estate
- Open to contributions from self-directed IRAs
- Carefully selected properties
- High potential returns
- Variety of offerings
securely through Yieldstreet’s
Yieldstreet is an online investment platform that specializes in alternative investment offerings designed to generate passive income and wealth for investors. The platform offers a 1-stop shop for a range of alternative investments ranging from real estate to structured notes and even art collections.
- Accredited investors looking to diversify
- Alternative investments to stocks and bonds
- Investors looking for passive income
- Easy-to-use platform
- Carefully selected offerings
- Excellent mobile app
- Full spectrum of alternative offerings
- Options for non-accredited investors
- Majority of investments only open to accredited investors
Is Private Equity Real Estate Investing Right for You?
Private equity real estate investments can add significant value to your portfolio and generate income. The question of whether they are right for you depends on a number of factors. If you’re in a place where you are not only accredited but can handle the buy-ins that come with most private equity real estate funds, kudos to you.
Even if you fall into this category, you will still need to proceed with caution. Remember, the buy-ins are usually high, and you’ll likely be prevented from liquidating your investment for the entirety of the hold period. Then there is the risk factor to consider. That’s why it’s advisable to consult with a reputable financial adviser about your investment goals, risk tolerance and available capital before going forward.
If you complete your due diligence and you still like what you see from a private equity real estate fund, move forward and hope for the best. If all goes according to plan, a few years from now you will have made a tidy profit for yourself, all without having to act directly or do the elbow grease that comes with managing real estate assets.
Arrived Homes allows retail investors to buy shares of individual rental properties for as little as $100. Arrived Homes acquires properties in some of the fastest-growing rental markets in the country, then sells shares to individual investors who simply collect passive income while waiting for the property to appreciate in value over 5 to 7 years. When the time is right, Arrived Homes sells the property so investors can cash in on the equity they’ve gained over time. Offerings are available to non-accredited investors. Sign up for an account on Arrived Homes to browse available properties and add real estate to your portfolio today.