The Beginner's Guide to Private Equity Real Estate Investing in 2023

Investing in non-public companies but enjoying the returns real estate offers can be a great way to diversify your portfolio. Here's everything you must know about private equity real estate investing for beginners in 2023.

Private Equity Real Estate Investing for Beginners

Private equity real estate investing occurs when a private equity firm pools money from investors to buy, improve, and sell businesses. The firm keeps the companies for a short time, paying investors back with interest as quickly as possible.

Most real estate private equity funds are for accredited investors only. This means only investors who make at least $200,000 a year or have $1 million or more in net worth can invest.

Who Can Invest in Private Equity Real Estate

As discussed above, most private real estate funds are open only to accredited investors. However, here are the most common investors who can take advantage of these real estate investment opportunities.

Third Parties

Asset managers can invest in private equity real estate investments for the institutions they represent. Third parties also include the professionals who manage the wealth of high-net-worth families.

Institutions

Institutional investors are the most common type of real estate investor investing in private equity real estate funds. These institutions usually represent pensions, mutual funds, and banks.

Private Investors

Private investors can invest in private real estate funds with a high enough net worth. Even if the investment doesn't require accredited investors, they often have high standards regarding a real estate investor's income and real estate assets, as most private equity real estate funds have a high minimum investment requirement.

Types of Private Equity

Venture Capital 

Venture capital private equity investments invest in small businesses just starting out but with high potential. These businesses don't often have the funds needed to grow but have the capability of succeeding. Venture capital markets are usually higher risk because there's little to no history behind the investments, but they can offer great returns.

Growth Equity

Growth equity private equity real estate investors invest in companies with a proven track record. The private equity firm invests in profitable companies with little debt. Growth equity investments invest in companies looking to grow and/or enter new financial markets.

Buyouts

Buyouts, whether management buyouts or leveraged buyouts, is a private equity fund structuring that buys out an existing business. Some investment strategies buy the company out entirely, and others take a majority ownership stake in the business. The private equity firms leverage the funds from management, investors, and creditors to take a large stake in the business to receive large returns.

Private Equity Investment Strategies

Core

A core private equity real estate investment is the least risky investment strategy. It focuses on high-value investments with little to no risk, such as fully leased multi-unit properties. As a result, the returns are lower on core investments because the risk is lower.

Core Plus

A core plus investment strategy is slightly higher risk than a core investment because it combines core (non-risky real estate properties) and value-added properties. It's like the best of both worlds between no risk and a lot of risk, providing middle-of-the-road returns.

Value Added

Value-added real estate investment strategies invest in properties that can use an increased value. The private equity firm buys the property, increases its value, and sells it for a profit.

Opportunistic

Opportunistic real estate refers to investors who invest in risky opportunities in exchange for higher returns. The rate of return on these investments is much higher to make up for the risk. They focus on commercial properties in underdeveloped areas or on undeveloped properties.

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Best Real Estate Private Equity

Residential

Up until recently, most real estate private equity investors invested in commercial real estate. This is because residential properties were too hard to manage in the quantities desired in private equity investments. Still, large-scale single-family homes have become a typical private equity real estate fund.

Commercial

Most private equity real estate funds focus on commercial real estate. This could include apartment buildings, shopping malls, strip malls, office spaces, and industrial buildings.

How to Invest in Private Equity Real Estate

Select a Private Equity Firm

Do your due diligence and find a private equity firm with the experience and risk tolerance that matches your financial goals. Each private equity firm has different private equity fund structuring and beliefs. Choose the company that will match what you want.

Select the Type of Private Equity to Invest In

Decide if you want to invest in residential or commercial real estate. Residential usually means single-family homes, but it can also include multi-family properties. Commercial real estate focuses on office buildings, hotels, shopping centers, and large multi-family properties like apartment buildings.

Research Companies

Before choosing a private equity firm, research the following factors to ensure it's a good investment opportunity for you.

Location

Find out where the fund focuses its investments. For example, is it a large geographic area like New York City, or do they focus on smaller areas within larger markets?

Capital Structure

Determine if the private equity fund invests in the property's equity or debt. Most invest in equity but don't assume, as some prefer the lower risk of the debt side even though the returns are lower.

Profitability

Understand a company's profitability goals. Are they focusing on lower risk (lower profit) properties or higher risk properties with higher returns?

Amount of Investments

The number of investments within an equity fund makes a difference too. Diversifying your portfolio is critical, but how thin do you want to stretch yourself? There is such as thing as over-diversification, so find your happy medium.

Sector

Think about what sector you want your money invested in, whether commercial real estate, residential, or a combination of the two. For example, if you focus on the commercial real estate market, will you focus on industrial, hospitality, offices, shopping malls, or multi-family properties?

Evaluate Risk

Every investment opportunity has risks, but you should know your real estate asset risks before investing.

Transparency

Determine the level of transparency of the private equity real estate fund. For example, do they disclose what they will invest in and what model they will follow throughout the investment's term? The more transparent a fund is, the easier it is to decide if it's right for you.

Illiquidity

Know how long your money will be tied up and if there is a predictable cash flow from the rental income. If you must tie up your funds, make sure it's a timeline you're comfortable with, knowing that you can't access your funds for that time.

Considerations Before Investing in Private Equity

Minimum Investment

Each real estate investment has a minimum investment. Since you must be an accredited investor for investing in real estate private equity, the minimum investments are usually high. Therefore, make sure you can afford the requirement without putting yourself in a financial bind.

Risk

Think of your risk tolerance. Are you a high-risk or low-risk real estate investor? The higher the risks you take, the greater the return, but there's also a greater risk of loss.

Potential Return

Private equity returns are never a sure thing, but when you diversify your portfolio with high and low-risk investments, the better chance you have of securing higher returns.

Real Estate Private Equity Pros

• Most real estate private equity funds are institutional grade investments, which means you'll have access to institutional size returns
• You can choose a private equity fund structure that offers diversification to offset any significant losses
• Most private equity real estate investments are passive investments

Real Estate Private Equity Cons

• There are often high fees incurred in private equity real estate
• You might have to promise funds on an 'as-needed' basis which means when underlying companies need more money, they come to the private equity investors
• You can forfeit your shares if you can't meet the capital call requirements

Private Equity vs. REITs

Private equity funds are for high net worth investors. The funds are privately held, and investors cannot sell their shares on the public market. When you invest in private equity, you are in the investment for the duration of the investment.

REITs or real estate investment trusts are publicly traded investments. You buy shares of a real estate company that buys real estate, manages it, and pays 90% or more of its profits to its shareholders. Investors can sell their shares on the secondary market if they need to liquidate their investment for greater cash flow.

The Bottom Line

Private equity real estate investing for beginners in 2022 is a good way for accredited investors to diversify their portfolios. Real estate investors can invest in a real estate investment trust for a more liquid investment or diversify with private equity for the potential of higher returns with less liquidity. Learn more by signing up and visiting our blog.

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