A real estate private equity fund is a limited partnership among a select group of investors who combine their capital to acquire, develop, or improve commercial real estate to be sold later for a maximum return on investment. These properties generally include self-storage facilities, mobile home parks, medical offices, industrial spaces, retail, and others.
Private equity funds are not registered with the SEC and, therefore, are not subject to any public disclosure agreements. In addition, the investments are long-term and liquid. These are the two main fundamental differences between a real estate investment trust and a real estate private equity fund.
The parties of the real estate private equity fund include an investment manager, called a general partner or sponsor, and the investors, known as limited partners.
General partners make all of the decisions regarding the investment. They provide some of the capital, secure the assets, and manage the properties and the fund. They typically charge small fees for managing the fund but do not earn their performance fees until all investors have been paid their preferred return.
The limited partners provide the majority of the capital to be invested. Real estate private equity funds require substantial investments. Therefore, these funds are only available to accredited investors.
Accredited investors, as defined by the SEC, are high-net-worth individuals, banks, and other financial entities referred to as financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. In other words, these types of investors are more able to endure the risks associated with investing.
A significant amount of real estate private equity funds are available for investors. As with mutual funds, stocks, bonds, and other investment vehicles, real estate private equity funds fall into different categories based on risk exposure.
The four types of real estate private equity funds, or investment strategies, are Core, Core-plus, Value-add, and Opportunistic. Let’s take a closer look at each of these types of assets.
1. Core: These investments favor conservative investors who are only willing to accept minimal risks. This fund type offers the lowest risks and lowest returns. Core assets are usually stable, fully leased, high-quality properties in newer condition and located in primary markets. Core assets have a predictable cash flow and little to no leverage.
2. Core-plus: This fund type is very similar to Core, except there is a little more risk due to the quality versus location mix. For example, the asset may be of high quality but located in a secondary market or may be lacking a little in quality but located in a primary market. These funds may contain 30 to 50 percent leverage.
3. Value-add: These funds consist of properties that have been improved, redeveloped, or newly developed to increase their value. The opportunity to add value ranks above their market or location as investors and sponsors believe the value-added adjustments will garner higher appreciation than the market or location.
Value-add fund types have more risks and return than the previous two investments. Value-add properties also utilize more leverage – up to 60 percent.
4. Opportunistic: These funds offer the highest risks and highest returns and have the greatest leverage of these investment strategies at above 60 percent. The investment strategy involves redeveloping poorly operated business assets, vacant or neglected buildings, or developing new properties.
The end-target markets may be niche business sectors, and, like value-add investments, the location is secondary to the opportunity. The return on investment relies on appreciation, and most of the return occurs at the end of the holding period.
Real estate private equity funds are attractive investments for several reasons:
Why be hands-on with renovating or construction if you don’t have to be? Some people do not have the time or ability to find, refurbish, or build from scratch. Real estate private equity funds allow investors to benefit from hot real estate markets and sectors without being in the weeds of all of the details. They also don’t have to have all their money tied up at once as they would if investing in property alone.
Real estate private equity funds provide investors with a few ways to earn a return, such as with annually distributed preferred returns throughout the life of the investment and additional returns when the asset sells.
Property depreciation has always been helpful to real estate investors as it offsets some of the earnings. The same is true when investing in real estate through private equity funds.
Real estate private equity funds allow investors to focus on an investment strategy specific to their desires regarding return on investment. In addition, these funds allow investors to focus on specific niche investments, such as self-storage if they wish.
Investing in real estate private equity funds creates a more diverse portfolio for investors in that real estate is a great asset class to add balance to stock investments. Furthermore, private equity funds also offer diversification among the fund types.
If those are not enough reasons to invest in private equity funds, then consider those famous words of Billionaire Andrew Carnegie when he said 90% of millionaires got their wealth by investing in real estate. This statement may or may not be accurate, but you can’t dispute the popularity and success of real estate investing across the U.S. These people aren’t risking everything they own to flip properties for fun.
But why work so hard and take such risks when it’s unnecessary? There is no need to risk your family’s future by buying a single-family residence, hoping to flip it, and praying to be profitable when and if you do.
Instead, invest in one of the lucrative commercial real estate niches and leave the market analyses and sweat equity to the pros at Patriot Holdings. Their team has helped investors earn an average of over 25% IRR since being in business. Patriot Holdings offers a variety of investment options and assists investors in choosing the ones most suitable for their investment goals.
Contact Patriot Holdings today so you can start earning returns tomorrow.