There are many ways to invest in real estate. You can buy your own properties to rent or flip in an effort to generate income, but you can also invest in shares of real estate, similar to buying stocks. This is essentially what private equity real estate entails: pooling funds from several investors to acquire real estate, with the goal of generating dividends or profits.
Before deciding if a private equity real estate investment fund is the opportunity for you, it’s important to know what it is and how it works. Going through the cost, the pros and cons, and how they compare to similar investments will help you decide if private equity real estate funds make the most sense for you.
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What Is Private Equity Real Estate?
Private equity real estate is a type of investment that involves the acquisition, financing, and ownership of properties via pooled funds from many investors. Private equity real estate involves a long-term outlook, as well as a significant upfront commitment, because the properties are generally larger and more complex (think strip malls and apartment complexes) than other types of real estate investments (like single-family homes).
Your funds are considered illiquid because they are stuck in long-term investments which can last for up to twelve years. Because of the high upfront cost and the period of time that those funds are locked up, common investors of private equity real estate are usually institutions, asset managers, or those with a high net worth.
Over the years of the investment time frame, the fund makes investments and draws from the initial capital invested. Distributions back to investors can be slow, and investors cannot demand liquidation (sale of their shares). Unlike flipping a home, owning a rental, or even purchasing your own home, you have less control over your money once you’ve invested in a private equity real estate fund because of contracts and agreements made with your firm and other investors. You aren’t doing the bulk of the work managing the properties; a firm will take care of most of it, and your investment will help finance the management (or a share of your dividends/profits, over time).
Types of Private Equity Real Estate Funds
Some common types of private equity real estate funds include: office buildings, retail property, shopping centers, industrial properties, and apartment complexes. Some less-common types include: hotels, storage facilities, medical offices, student housing, manufacturing space, etc. For those who would look for financing options for real estate investing, private equity real estate might not be for you due to the high capital required and delay in payment.
Costs of Private Equity Real Estate Funds
The high initial investment cost paired with a long lockup period can be difficult for investors who don’t have extra liquid assets for the years that their money is locked in their private equity real estate fund. Not only are there costs associated with initial capital for the investment fund, but there are also fees associated with organizational costs that tend to be proportional to fund size.
Management fees are another aspect of private equity real estate fund costs. These management fees include the cost of running the fund to ensure its success, as well as managing or maintaining the physical property. In addition to that are administrative fees and third party fees related to the activity of the fund.
Private equity real estate firms require an upfront commitment anywhere from around a quarter million dollars up to millions of dollars. Because of these high investments for upfront costs, the person or corporation making a private equity real estate investment would need to prove a significant yearly profit.
Pros and Cons of Private Equity Real Estate Investing
Benefits of Investing in Private Equity Real Estate Funds
The high capital, lack of liquidity, and accompanying fees can seem like private equity real estate investing is not a desirable option. However, there are pros and cons to this type of real estate investing just as there are pros and cons to any type of investing. The pros involve the potential for high levels of income and strong price appreciation. Meaning that investing in private equity real estate is a great way to build wealth despite the long wait, fees, and high capital needed upfront. Though the management fees can be high, it can also be an attractive option to not have to manage your own property.
Drawbacks of Investing in Private Equity Real Estate Funds
The cons involve the risk, and limited ability to take part in private equity real estate investing as many investors simply cannot afford the commitment. If a fund underperforms, investors can lose their entire investment. This is especially worrisome considering the high upfront costs and fees. Having no liquidity is another con as investments can fluctuate with the market to maximize your profit.
Real Estate Funds: REITs vs Private Equity Funds
Real estate investment trusts (REITs) and private equity real estate investing opportunities have their similarities, but their differences are much more profound. Whether their differences will be pros or cons will depend on the type of investor you are and what you’re looking for in a real estate investment opportunity. Both REITs and private equity funds are used to diversify a long-term investment portfolio and both invest in similar types of real estate: office buildings, apartment complexes, etc. Otherwise, these two real estate investment opportunities are quite different.
For one, the entry costs are much different. Whereas a private equity fund requires a large capital, investing in a REIT can be as low as the price of one share. REITs are also more flexible and offer a liquid method of investing in real estate. The money you make by investing in a private equity fund tends to be higher given the higher capital required to invest. However, you have much more control over what you are investing in in private equity real estate investing as opposed to REIT investing. Real estate is purchased after the initial costly investment is offered, but for a REIT investment, property was already purchased.
As for real estate investing, it’s clear that private equity real estate opportunities are not for the casual investor. With a large upfront commitment and years of having money tied in with the ebbs and flows of the market, it’s an opportunity best suited for those with a large sum of investment capital at their disposal. This is why private equity funds are usual invested by institutions with that type of available capital. However, with the diversity of real estate opportunities, there is a real estate investment opportunity for everyone.
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