The Big Picture On Private Equity Real Estate Investing:

    • Real estate private equity involves pooling investments to buy properties, offering high returns (15-30%) with minimal management responsibilities but typically requires high upfront capital and long-term commitment.
    • Investments come in two forms: syndications (focused on single properties) and funds (diverse portfolios), providing tax benefits and diversification but limiting investor control and liquidity.
    • While private equity real estate can outperform traditional investments, it carries risks such as capital calls and requires accreditation or large sums to participate independently unless through investment clubs.
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Private Equity Real Estate Investing

Have you heard the term “private equity real estate investing” and don’t know how it works?

Don’t sweat it — private equity might sound intimidating, but it’s pretty simple. It’s a lot easier to invest in real estate private equity than it is to buy a rental property.

You might just find yourself humblebragging about your private equity real estate investments at the next cocktail party.

 

What Is Private Equity in General?

Private equity simply refers to an equity interest — an ownership interest — in a private company. In other words, owning part of a company that isn’t publicly traded as a stock.

In the case of real estate private equity, the company is typically a single-asset LLC that owns an investment property and nothing else. You hold fractional ownership of a property by holding ownership of its company.

Private equity in real estate investments is a niche, of course. Most private equity is in operating businesses. The classic example of a private equity investment is a private equity firm that buys a small business and grows it quickly by infusing money into marketing campaigns and bringing in experienced leadership. The firm then turns around and sells the company after it has grown, thereby earning a tidy profit.

Other forms of private equity include hedge funds and venture capital that buy and grow startups. Hedge funds invest in private equity companies as high-risk, high-return investments and hedge against some of that risk through strategies such as short-selling stocks or trading options and futures.

This is fascinating if you’re a big ol’ investing nerd, but that’s outside our focus on real estate investing.

 

Private Equity Investment Comparison by Category

Let’s outline the differences between various private equity investment types.

Type of Private Equity Average Hold Period (Years) Typical Minimum Investment
Real Estate PE Funds 5-7 $250,000
Growth Equity 3-5 $500,000
Venture Capital 7-10 $100,000

 

What Is Private Equity Real Estate Investing?

In real estate investing, private equity takes two broad forms: syndications and funds.

 

Real Estate Syndications

“Thanks Brian, that explanation gives me more terms I don’t know. So what is a real estate syndication?”

A real estate syndication is a private equity investment in a single property or small portfolio of properties. The syndicator — a professional real estate investor also known as the sponsor or general partner (GP) — finds a commercial property and raises money from outside investors like you and me to help fund it. In exchange, we passive investors (limited partners or LPs) get an ownership interest in the returns.

In other words, you buy fractional ownership in a property (or a few properties as a package deal).

Real estate syndications have a fixed start and end: the sponsor buys the property, often renovates it to force equity, and then sells it. Upon sale, everyone (hopefully) gets a nice paycheck, and the deal is over.

You can think of it like a glorified flip, with the sponsor flipping an apartment complex rather than a single-family home.

Real estate syndications aren’t limited to multifamily properties, although they are the most common type. Syndications could feature any type of real estate, from office buildings to retail space and self-storage facilities to mobile home parks, industrial properties, and beyond. Beyond different property types, these investment opportunities could be existing buildings or new construction real estate development.

Some real estate syndications only allow accredited investors to participate. These fall under regulation 506(c), with looser rules for sponsors to advertise and raise money. Sponsors can alternatively structure the deal as a 506(b) syndication, which allows up to 35 non-accredited investors to buy in, but they can’t market the syndication to the general public.

 

Real Estate Funds

Rather than buying a specific property, you could invest in a real estate fund that owns many properties.

Or will you in the future — often, you buy into funds blindly without knowing exactly what assets they’ll buy?

Real estate investment funds sometimes have a set period for raising money, then close. The fund manager might plan on selling all the funds’ assets after a certain time, and then the fund ceases to exist. Once you buy in, you often can’t sell shares until the fund liquidates.

Alternatively, some private equity real estate funds are open-ended, with no fixed end date. They buy properties, hold them for a few years, then sell them and buy more. After a minimum holding period, individual investors can buy and sell shares anytime, or more often.

Most real estate private equity funds only allow accredited investors to participate.

 

Returns on Real Estate Private Equity

As with every other type of investment, returns vary. Still, wealthy investors like real estate syndications and other private equity real estate because of the high historical returns.

Annualized returns typically range between 15–30% and are often higher. One general partner with whom we’ve invested several times in our real estate investment club, Rise48, has delivered average annual returns of 70.5% across the properties it’s sold.

As with most long-term real estate investments, these returns break down into income and profits upon sale. Broadly speaking, investors often earn 4–8% annual yields for income while owning a private equity real estate investment, plus another 8–20% annualized returns in profits upon sale.

But these deals come with slightly more complex profit-sharing arrangements than just owning a fixed percentage of the pie. Often, sponsors offer a “preferred return” to attract passive investors — a percentage return that LPs get first priority in receiving before the GP starts collecting their returns. Common preferred returns range from 6–8%.

The sponsor takes on all the labor and liability, however, and they want compensation for their trouble. So above the preferred return, they typically get a separate portion of the profits (called the “promote”). For example, above an annual 7% preferred return, profits might be split 80/20, with 20% going directly to the sponsor and the remaining 80% divvied up proportionately among passive investors.

That sometimes gets further complicated when there’s a “waterfall.” In that case, the profit sharing changes depending on the profit. Continuing the example above, the profit split might be 80/20 for returns between 8–12%, then drop to 70/30 for profits between 12–20%, then 50/50 for profits above a 20% annualized return.

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Fund Fees and Performance Metrics

Don’t get spooked by the fees — they’re actually pretty straightforward once you understand them. Private equity real estate typically follows what’s known as the “2-and-20” model. But what does that actually mean?

Let me break it down:

The “2” refers to the annual management fee, typically 2% of committed capital. This covers the fund’s operating expenses, staff salaries, day-to-day operations, you name it. Consider it as paying someone to do all the heavy lifting you’d rather avoid.

The “20” is the performance fee, or carried interest (“carry” in industry speak). This means the fund manager takes 20% of profits above a certain threshold. Remember those preferred returns we talked about? That’s usually the threshold.

Here’s an example: Let’s say you invest $100,000. You’ll pay about $2,000 annually in management fees. If the fund generates a 25% return ($25,000) and has an 8% preferred return ($8,000), the manager would get 20% of the remaining $17,000 profit ($3,400), which means you’ll have $21,600 in profits minus the management fee.

Take note: the preferred return of $8,000, or whatever amount you agreed upon, goes to your pockets.

Advantages of Private Equity Real Estate

Why do people like me invest in real estate private equity? Let me count the reasons.

 

High Returns

We just talked about these, so I won’t bludgeon the point to death, but high returns are the primary reason investors like private equity real estate investments.

I mentioned one sponsor who delivered an average return of 70.5%. While that’s not the norm, many sponsors deliver an average of 15–30% returns.

For example, we’ve invested with MAG Capital Partners, which has averaged a 20.0% return on investment. We’ve also invested with Bronson Equity (average return: 28.6%) and Wolfe Investments (average return: 67.7%).

That’s why people opt into private equity investments.

 

Full Tax Advantages

Real estate comes with a slew of tax benefits. If you’ve ever owned a rental property, you know all about landlord tax deductions, which go on a separate schedule on your tax return (Schedule E).

All those same deductions come off your taxable income on the K1 you receive from the sponsor.

You also get real estate depreciation on steroids. Not only does the standard building depreciation come from your taxable income, but most sponsors conduct a cost segregation study when they buy a property. That lets them reclassify as much of the building as possible to other tax categories that offer faster depreciation.

The upside: you get to show losses on your tax return, even as you collect real passive income from your private equity investment.

In short, you get even better tax advantages on real estate syndications than owning rental properties.

 

No Property Management Headaches

Managing properties is a huge pain. You must manage the property manager even when you hire a property management company.

Private equity real estate syndications are completely passive investments. All you do is sit back, collect passive income streams from your real estate investments, and then celebrate the big payday when the property sells.

The sponsor worries about property repairs, maintenance, and hiring and managing property managers. They also worry about tenant phone calls at 2 a.m., filling vacant units, screening renters, and signing lease agreements.

Good riddance.

We’re all busy. I don’t know about you, but I don’t need another side hustle. I just want a diversified investment portfolio that includes many different real estate properties and stocks.

 

Diversification

Each real estate investment club member can invest as little as $5,000 in real estate syndication projects. We feature a new private equity real estate deal each month, and participation is purely optional.

While $5,000 might sound like a lot, it’s far less than the $50,000 or $100,000 typically needed for private equity real estate. Or, for that matter, a similar amount is needed for a down payment on a rental property, closing costs, initial repairs, and a cash reserve.

Think of it this way: $50,000 could either get you one rental property down payment, one real estate syndication by yourself, or ten real estate syndications when you split the investment with a club. And each one of those ten properties could be in different real estate markets.

Finally, private equity real estate assets have almost no correlation with stock markets. Compare that to the very real correlation between stock markets and real estate investment trusts (REITs). This means they offer little diversification benefit, despite investment funds calling REITs “alternative investments.”

 

No Legal Liability

Limited partners take on zero legal liability. They can’t be named as defendants in a lawsuit. Period.

The same can’t be said when you own rental properties as a landlord. Tenants, neighbors, contractors have sued me — you name it. It sucks.

 

No Loan Liability

Likewise, you don’t sign as a personal guarantor for loans against private equity real estate syndications.

The general partner typically has to sign a personal guarantee, which is one of the many reasons why they’re entitled to a separate share of the profits.

investment property loansWhat do lenders charge for a rental property mortgage? What credit scores and down payments do they require?

How about fix-and-flip loans?

We compare the best purchase-rehab lenders and long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Drawbacks of Private Equity Real Estate

No investment is perfect; otherwise, everyone and their mother would invest in it, and the returns would plummet.

So why does the average person not invest in real estate private equity?

 

High Minimum Investment

The minimum investment for most private equity real estate deals is between $50 and $100K. Most people don’t have that lying around.

Unless you invest through a real estate investment club like ours, you must raise the entire amount yourself. Yikes.

 

Some Restrict Access to Accredited Investors

You know how people complain that the rich have access to better investments than the rest of us?

That particular complaint is true, thanks to Uncle Sam’s paternalism. The SEC restricts who can access private equity real estate investments.

In fact, most private equity isn’t available to non-accredited investors. It took us a lot of networking to find a solid pool of sponsors who allow non-accredited investors, not just institutional investors and high-net-worth individuals.

 

No Liquidity, Long-Term Commitment

Once you invest in private equity, your money is locked in. You can’t pull it out in an emergency — you’re at the mercy of the general partner to return your capital to you.

Among real estate syndications, the typical time frame ranges from two to seven years.

 

No Control

When you own an individual property, you are in the driver’s seat. You can renovate the property or not, choose which renters you like, and sell when you feel like selling.

For that matter, you can use it as a short-term vacation rental instead of a long-term rental (assuming your city lets you). You could even vacation there yourself.

Not so with real estate private equity investments. The asset manager (the sponsor) makes these decisions — you’re just along for the ride.

 

Risk of Capital Calls

If the sponsor experiences unexpected expenses and runs out of capital reserves, guess who they call? Certainly not the Ghostbusters.

They call you, palm out, and pockets empty. Many sponsors and limited partners consider this the worst-case scenario: a capital call demanding more money from passive private equity investors.

Fortunately, it doesn’t happen often and has never happened in our real estate investment club. But it’s a real risk, and I do not doubt that it’ll happen sooner or later if we invest in enough deals (which we plan to).

 

Step-by-Step Guide for Investors

The whole thing is actually a bit complicated, but these are what the steps typically look like. It may appear simple, but mind you, it’s not easy. 

1. Check your eligibility: If required, make sure you qualify as an accredited investor, assess your available capital for long-term investment, and confirm you have a solid emergency fund separate from your investment money.

2. Get serious about due diligence: Study potential sponsors’ track records, ask for references from past investors, review historical performance data, and verify the sponsor’s experience in your target property type.

3. Choose your investment strategy: Choose between syndications or funds, select your preferred property types (multifamily, office, industrial, etc.), determine your geographic preferences, and consider whether you want income, appreciation, or both.

4. Prepare for capital requirements: Set aside your initial investment, prepare additional capital for possible capital calls, and plan for the illiquidity period (typically 5-7 years).

5. Structure your investment properly: Understand all legal documents, set up the right entity structure if needed, plan for tax implications, and consider working with a financial advisor or tax professional.

6. Set up a system to monitor your investment: Track quarterly reports, understand your K-1 statements, monitor capital call notices, and stay informed about market conditions affecting your investment.

Tip: Investment clubs or smaller syndications can be a great way to learn the ropes before committing larger sums. You’ll get real experience without risking your entire investment budget.

Should You Invest in Real Estate Private Equity?

Personally, I love real estate syndications. I consider them the best of both worlds: they offer all the advantages of direct real estate investments without the responsibilities or headaches.

It’s also a lot cheaper to invest in them, at least if you invest through a real estate investment club like ours that pools money to meet the minimum investment. You can spread your money across many more deals and build a diversified portfolio.

But you need a separate emergency fund when you park money in long-term investments like private equity real estate. If you live hand-to-mouth, with little cash cushion for life’s hiccups, you aren’t a good fit (yet) for private equity investments.

Still, if you’re reading this article, I do not doubt that you’ll get there. And when you do, contact us to see if we can help.

 

What has held you back from these types of investments in the past? How do you see real estate private equity fitting into your broader real estate investment strategy?

 

 

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