Investors looking for a place to put their money have a lot of options to choose from. One asset type that can provide a positive ROI is private equity real estate.
In this post, we’ll go over what private equity is, who can invest in it, what the typical returns are, and more. Let’s get started!
What is private equity real estate?
Private equity real estate refers to investments made by private equity firms in real estate properties. These firms raise funds from investors and use the pooled capital to acquire, manage, and sell properties. Investors then get to share in any capital appreciation and investment dividends.
It’s important to note that private equity real estate is not the same as public real estate investment trusts (aka REITs). Public REITs are traded like stocks on the stock market. As a result, they are much more liquid and heavily regulated than private equity real estate.
Who can invest in private equity real estate?
Private equity real estate investments are typically only available to three types of investors:
- Accredited investors. These are individuals with an average annual income of at least $200,000 (or $300,000 with a spouse) or a $1 million net worth (excluding their primary residence).
- Institutions. These are large organizations that want to invest capital, such as pension funds, mutual funds, banks, hedge funds, endowments, and insurance companies.
- Third parties. These are asset managers that represent institutions (like the ones listed above) or high-net-worth individuals and families (HNWIs) via family offices.
In the past, investing in private equity real estate required minimum investments of $250,000. However, recent changes in government regulations have made it so that you can now invest in private equity real estate for much less. For example, the Invest.net SFR Fund I lets you invest for as little as $20,000.
Types of private equity real estate properties
Private equity real estate funds can include a variety of property types. Some common property types are office buildings, industrial properties, retail properties, and multi-family apartments.
Other niche property types include single-family homes, student housing, self-storage, undeveloped land, and manufactured housing.
Private equity real estate investment strategies
Private equity real estate funds can have different instrument strategies as well:
- Core. This type of investment is composed of predictable cash flow properties. It offers the least amount of risk and the lowest potential return.
- Value add. These investments involve purchasing properties to redevelop and sell them for a profit. They require taking on more risk, but they also have the potential for greater returns.
- Core plus: These hold a mix of core and value-add investments. As a result, they require taking on a bit more risk than core investments but not as much as value-add investments.
- Opportunistic: These typically hold properties in undeveloped or underperforming markets, presenting the greatest potential for returns but also the highest level of risk.
Typical private equity real estate returns
Now that you understand what private equity real estate investments are, you may wonder what types of returns you can expect from them.
Though returns are never guaranteed and every investment comes with some risk, annual returns for core investment strategies often reach the 6% to 8% range. Core-plus strategies can yield 8% to 10%, and value-add and opportunistic strategies can yield even higher rates of return.
Of course, the higher the potential return, the more risky the investment tends to be. That’s why it’s important to do your due diligence on any private equity real estate investment.
Benefits of investing in private equity real estate
So what are the benefits of investing in private equity real estate beyond the potential high returns? Here are some other advantages:
- Diversification. Private equity real estate can be a great way to diversify your portfolio beyond stocks and bonds. In addition, each investment includes many different properties, which means your money isn’t concentrated into a single property, lowering your overall risk of loss.
- Passive income. When you invest in private equity real estate, you don’t have to worry about finding, buying, managing, or selling properties. The investment fund manager does that for you in exchange for a management fee (usually somewhere between 1% and 2%).
- Increased access. Private equity real estate funds can give you access to property investments you wouldn’t otherwise have (e.g. hotels, residential, commercial properties, and self-storage facilities). By pooling your money with other investors, you can get in on bigger deals than you could on your own.
- Tax efficiency. Most private equity real estate investments have long holding periods. As a result, they are usually taxed at a long-term, as opposed to a short-term, capital gains rate, and the long-term capital gains rate is generally lower.
Investing in private equity real estate
At the end of the day, the decision of whether to invest in private equity real estate is up to you. Weigh the risks and benefits carefully and do your research.
Before investing in any particular private equity real estate fund, you should consider the following factors:
- Upfront capital requirement. Some private equity real estate funds have high minimum investment amounts. Whatever it is, make sure you can afford it.
- Risk level. Every investment comes with risk. Ensure your portfolio can handle the risk of a private equity real estate investment.
- Potential returns. Make sure the potential returns justify the level of risk. If the potential returns aren’t high enough, the investment may not be worth it.
- Past performance. Though past performance never guarantees future results, a fund’s track record can be a good indicator of how well it is managed and operated.
Once you’ve considered all of these factors, you’ll be better positioned to make an informed investment decision.