Real estate has become a popular investment framework over the last 50 years. Buying property may become a great start for investing in real estate as an asset class because of the ability to use a lot of leverage. However, if you have decided to multiply your profit and seek an alternative investment opportunity to diversify your portfolio, private equity real estate investing is worth considering.
What is private equity real estate investing?
To begin with, private equity real estate takes various approaches to property ownership. Generally, it entails a firm pooling capital from outside investors and then using that capital to purchase and develop properties for a short period before selling them. Ownership strategies differ from new development and raw land holdings to full redevelopment of existing properties or cash-flow infusions into troublesome properties. Although it is crucial to know that this method of real estate investing is primarily accessible to institutional investors or high net-worth investors.
The procedure which a real estate investor takes part in, usually demands a minimum contribution of $250,000. However, the sum of investment is individual for every fund and can easily reach up to millions. Also, note that a private equity fund differs from a real estate investment trust (REIT), although it sounds familiar. The distinction between REIT and private equity funds lies in trading. Unlike most REITs, which are highly liquid and trade under considerable volume, real estate funds don’t trade like stocks and update shared prices once a day. Additionally, private equity funds are operated under less strict conditions.
Pros and cons of investing in private equity real estate
Now you have a general understanding of what private equity real estate is and the principles of its work. In order to understand whether you should focus on property investment, it’s important to examine all the benefits and risks of it.
The first advantage of investing in private equity real estate is the profit. In private equity, you can develop your business much more substantially. The peculiarity of private equity real estate is the space for financial perspectives. Thus, you may multiply the revenue several times in just a few years compared to real estate investment, where you are not likely to at least double the income.
Another benefit is diversification. Private equity investors take advantage of diversification as companies often invest in a wide variety of real estate assets. Therefore, private real estate provides a huge scope for the traditional stock/bond portfolio. Most remarkably, giving the asset management part of investing over to a fund manager, investors can get returns in exchange for minimum efforts on their part.
Although the perspective of investment homes for sale is quite attractive, it’s crucial to mention possible risks which may be faced. The most common reason to question investing in private equity real estate is the costs. For example, you should calculate additional fees needed besides your minimum contribution to the private equity firm. It may become challenging for real estate investment companies who are not ready to address a capital call on an as-needed basis. So, simply put that if a fund is lagging, investors may lose their entire means.
Needless to say, high liquidity is also a significant factor for successful investment in private equity real estate. The absence of liquidity can influence the investments as they will fluctuate with the market to increase your profit.
Is it worth investing in private equity real estate?
Finally, you’re aware of the main features and “potholes” of private equity real estate. However, you have to consider some critical points before you engage with real estate investment companies. First, explore your investment objects, liquidity requirements, and possible risks in the real estate markets. Examine various funds to get a better understanding of the management strategies and make research on how each fund deals with costs and investment perspectives. Note that casual investors do not get involved with private equity real estate as it implies having a strong commitment and large sum of investment capital for their implementation.