What is Private Equity Real Estate?

What is Private Equity Real Estate?

Private equity real estate (PERE) is a professionally managed fund that invests in real estate specifically, as opposed to investing in private companies.

It's really an alternative investment class specifically geared towards real estate. So rather than investing in stocks and bonds, or even REITs, you could invest in a private equity real estate fund if you wanted to focus on real estate.

It's like direct real estate investing, except you don't have to worry about any of the management like if you had rental properties. Or you don't have to worry about any of the project management if you're doing a fix and flip. You don't have to worry about any of the risks normally associated with real estate. It's a very low-risk way of getting into real estate.

I say low risk because what's going to happen is you're going to go and you're going to research private equity firms that specialize in real estate, and you're going to find the ones that are performing well. They will have their history available. They'll have a long-term performance history associated with them, that you can research, just like you do when you invest in mutual funds or if you have ever looked at investing in REITs.

Alternative Asset Class

Private Equity Real Estate is a private alternative asset class, unlike REITs. The reason I say it's private is that REITs are mostly public companies with a public fund. Whereas private equity, just by the nature of the name, is a private company that you can't buy on the stock market. You can only invest in Private Equity directly from the private equity real estate company or through your investment advisor. You could also invest through a crowdfunding site if they are using crowdfunding to find investors.

And when you invest in the fund, there are much higher returns than REITs. Private equity real estate usually gives you somewhere in the 7%, 8%, 9% or 10% range. Whereas REITs are in the 2%, 3%, 4%, maybe 5% range. As I said, it's better than investing in single-family homes and fix and flips if you're looking for a secure investment with low management and low risk.

Private Equity Real Estate investing term?

PERE funds invest for the long-term and by the long-term, I mean, usually in the neighbourhood of 5 to 10 years. So, from that perspective, it's very illiquid. Meaning if you want to get out of this investment, it's very hard. There are some of them which do have this off-market place where you can go and find a way to sell your position or your partnership within the limited partnership. But it's very rare that you can get out of a Private Equity investment. It's really a locked-in investment. So you got to be very sure of what you're getting into it's.

Limited Partnership

A PERE is usually set up as a limited partnership with investors as limited partners and with the general partner responsible for the overall management of the fund, not the properties. There's usually a level of property management and ownership between the general manager and the property. Usually, the real estate that you're investing in is actually a company that is a specific entity company that has been set up specifically to hold one or two properties.

That special entity company is the company that manages the property itself and takes care of all the tenants and other management-related activities. And you, as an investor, do not have to worry about that. And usually, the fund does not have to worry about that also. Because all the fund is concerned about is managing the fund and making sure that the investment is performing properly by working directly with the people who are managing the property.

Types of Private Equity Real Estate

There are different types of private equity real estate investments. The most common are described as Core, Core Plus and Value Add.

Core

Core properties are usually properties that are very stabilized. They are fully rented. They are mostly newer properties. So, they are performing quite well. The problem with Core is although it's low risk, it's also low return because they're asking a higher price for the property.

Core Plus

Core Plus is a property that requires a little bit of work. Maybe some carpets and some painting, sort of like a small fix and flip. They get a little bit better return and of course, they have a little bit more risk.

Value Add

Then there are the Value Add properties. They are a higher-risk investment. The challenge with the value add is the Private Equity Real Estate fund will put some money into the property, usually, something like $10,000 per unit. This money is used to fix up the unit and then rent it out at a much higher rate. And that's how they are able to increase the value of the property so that the returns on Value Add Private Equity Real Estate investments can be slightly higher.

Just like REITs, Private Equity Real Estate investment funds specialize in different types of commercial real estate. So, you have residential private equity real estate funds that invest in multifamily units or garden homes. You have hospitality funds that focus on hotels and motels, and you have industrial funds that focus on warehouses. And then there are office funds that focus on office buildings.