In today’s financial market, it has become increasingly difficult to earn top-notch returns on investment such as bonds and stocks, therefore investors are turning their attention to alternative investments, one of which is private equity real estate.
That said, if you are a real estate investor or a stakeholder in real estate, it is important for you to know that private equity real estate is an alternative investment avenue with untapped opportunities, which is worth considering.
So, in this article, you will learn what private equity real estate is, how it works, and the immense benefits you might stand to gain by investing.
What is Private Equity Real Estate?
A private equity real estate can be described as a professionally managed investment structure that regroups the funds of investors to purchase and resell real estate assets.
Investing in private equity real estate entails acquiring, funding, and developing a single property or a portfolio of properties for a limited time before selling them off.
Private equity real estate investors are typically institutional investors, high-net-worth individuals, and other accredited investors.
This is because most private equity real estate investments require a large initial investment of $250,000, plus additional investment in the first few years.
Benefits of Private Equity Real Estate
Individuals can invest in private equity real estate actively as a direct buyer, or passively with a private real estate investment firm, or via a Real Estate Investment Trust.
However, who you decide to buy from or how you decide to buy a private equity real estate is not the most important part of the investment; the most important part of it are the benefits accruable to you.
Therefore, below are three major benefits that attract most investors and details just why adding private equity real estate to their portfolio might be a great idea:
Substantial Returns
Private equity real estate allows investors to generate probably the highest form of returns of any investment in the real estate business.
By virtue of the funds you have invested, you are entitled to a portion of a profit or income made from the investment.
Mostly, the profit or income is substantial because private equity real estate features using a large amount of capital to purchase top-quality real estate assets with opportunity to add value.
Low Volatility Rate
The ideal investment gives significant returns while being characterized by only low volatility.
While private equity real estate isn’t altogether volatility-free, it features a low volatility rate because it is somewhat immune to the daily shocks of the real estate market.
Values of private equity real estate do not move significantly on a daily time frame. Rather, they appreciate gradually over a period.
Diversification
As a private equity investor, you also enjoy diversification – your investment funds are invested in a wide range of real estate assets.
Examples of such real estate assets are:
- Land
- Office buildings
- Residential apartments
- Self-storage facilities
Types of Private Equity Real Estate Investments
Private equity real estate sees various fund options. These options work best for various investors depending on their present priorities, they include:
Core Funds
These types of funds are designed for investors who do not like to take huge risks.
It is a low-risk level fund with predictable cash flows. Usually, the fund will be invested in high-quality real estate assets like multifamily properties or multi-tenant properties.
Due to the low level of risk, this fund brings lower returns when compared to other funds.
Core Plus Funds
These types of funds are often mistaken for value-added funds. It offers its investors a slightly higher risk in exchange for higher profits.
According to the average real estate accountant, it is a mix of core and value-added funds.
Value-added Funds
Mostly, the real estate assets purchased under this type of fund are improved to add value to it and sold when the best opportunity to do so presents itself.
Under this type of fund, there is a medium-to-high level of risk but there is also a higher rate of profit than the previous two types.
Opportunistic Funds
These types of funds provide the greatest potential for huge profits, however, they also require investors to take on the most significant risk level. Also, it requires the highest amount of real estate finance.
These funds mainly invest in the development of raw land, underdeveloped areas, and underdeveloped markets.
Tips for Successful Investment in Private Equity Real Estate
Investing in private equity real estate involves a measure of vital knowledge. Here are some tips that would come in handy:
Learn About the Market Type
Before investing in a fund, it is of exigent importance that you understand the basics of the market type you are investing in.
Knowledge about the market type entails learning the business model of the fund and the type of property the fund plans to invest in.
There are a few types of property that funds are invested in. Some of these include:
- Multifamily properties
- Office buildings
- Industrial buildings
- Retail property
- Land development
Ensure you are confident in the type of asset the fund is investing in before you go ahead.
Learn About the Geographical Location
One factor that is vital to the success of any private equity real estate deal is the geographical location.
Funds invest in various locations. Some funds invest in urban locations (New York, San Francisco), whereas, other funds invest in suburbs (Atlanta, Boston).
Ensure to learn about the local market of a geographical location before investing in any private equity real estate there.
Learn About the Capital Structure
Private equity real estate deals are structured in various ways that allow for the inflow of capital at formation and outflow of profits at termination.
Hence, be sure to learn how the fund intends to invest the capital. More so, ensure you learn how much your profit is and when and how you will be paid before you invest.
Learn About the Number of Investments
Typically, most private equity real estate deals are structured to allow for several investments during the lifespan of that deal.
It is advisable to opt for deals to have numerous investments (8 to 10). When a deal has numerous investments, it is not putting all of its investors’ eggs in one basket.
Conclusion
Before investing with a fund, always ensure you thoroughly go through the details of the deal with a real estate accountant and real estate attorney to minimize risks. These two will assist you in safeguarding your capital in what will most likely be a profitable investment.