Invest in Private Equity Real Estate

When it comes to where they can invest their capital, investors have several options. One of those options is private equity (PE) real estate.

What is Private Equity Real Estate?

Private equity real estate uses funds from private individuals to buy privately-held real estate. These purchases are usually meant for commercial purposes. Not everyone who wishes to invest in real estate can invest in private equity funds. This is because investors are expected to contribute at least $250,000. For the average investor, this budget is too high. In fact, many PE managers want investors or institutions that can provide upwards of $20 million each. This isn’t always the case, and there are a few different ways to do this.

Invest in Individual Syndication

An individual syndication is when an investor pays for partial or full ownership in a single property. An example would be if you, as the investor, gave money to a local contractor building a multi-family complex in the area. This is investing in an individual syndication.

There are pros and cons to this type of private equity investment. Because you are investing in a single building, in a single geographic area, in just one asset class, it leaves you open to possible risk. However, if the building is successful, you could reap greater return on your investment.

Use a Fund Model and Invest with a Real Estate Firm

A fund model is similar to a mutual fund in regular investment terms. Fund models are usually managed by a real estate firm or manager, and it consists of several properties in different asset classes, locations and economics. This lessens the risk in the investment. This type of investment is never a single effort. Multiple investors contribute to the fund, and everyone’s money goes toward purchasing and improving these properties.

Diversifying a real estate investment in this manner is a good option for first time investors, as well as those investors who wish to have a more “hands-off” approach to their investments.

As an example, if you have $500,000 to invest in real estate, you have two options:

Your first option would be to invest the entire amount into one property. You own more of the property, but your risk is high. Should the property be successful, however, you stand to gain a great deal.

Your second option would be to invest in a fund model where the entire $500,000 is divided among 25 different properties. You own less of each property, but your risk is less and your chances high of generating a profit faster. 

Build Your Own Structure

Similar to an individual syndication, building your own real estate structure carries great risk and great reward. The biggest advantage to this investment is the fact that you are your own boss when it comes to contracting. However, if contracting isn’t your strong suit, you could find yourself struggling to make this work.

Risks and Outlook

Private equity investors have to realize that as with any investment, there’s always risk. In addition, PE investments may tie up capital for several years. There is little opportunity for an investor to withdraw from a private equity fund, and there may be times when capital calls come during times of low cash. Investing in real estate always carries risks, but for private equity managers, making sure investors understand the unique nature of the investment is a must.