In today’s real estate market, there are a near-endless number of ways to invest. Over the last several years, one of the most popular means of investment has become private equity. For those people unfamiliar with private equity investments, there are pros and cons aplenty when considering a private equity investment with your real estate capital.
Table of Contents - Private Equity for Real Estate Investing
What is private equity?
Just as the name would imply, private equity is a source of income, like a pension fund or an endowment that isn’t subject to public interference. Within the umbrella of a real estate private equity fund, a varying number of managers and agents are tasked with making a diverse array of real estate investments ranging from single-family homes to commercial development and everywhere in between.
Unlike a public company, which is subject to scrutiny from investors or unitholders, a private equity real estate fund allows its agents the freedom to operate with little oversight. Most private equity real estate funds may not micromanage their employees, but those same agents are held to aggressive profit benchmarks.
The most compelling reason to invest your capital is the potential for steady growth. One of the reasons private equity firms have become so popular over the last decade is the return on investment that successful firms receive. Most private equity firms earn these profits in one of two ways:
Successful private equity managers tend to get paid very well. The use of impressive incentives for those agents who make money fuels their need for consistent, substantial growth.
When a manager isn’t doing well with their portfolio, a real estate private equity fund reports those losses at tax time and uses the incentives to offset the tax they’d pay on their successes.
Provided there’s a balanced relationship between these two factors, real estate private equity firms can end up making big-time money for investors.
Freedom from restrictions
In Canada and the United States alike, public companies must file annual earnings reports alongside a host of regulatory documents to remain on the right side of the law. Those regulations become even more intense if you’re hoping to see your company traded on the Toronto Stock Exchange.
When you’re working with a real estate private equity firm, they’re under no such obligation. In fact, private equity firms in any market are not required to release their financial records to the public at any point.
The potential for big losses
A real estate private equity firm isn’t for every investor. For those without the investment capital to spend, a real estate private equity firm is anything but a sure bet. Real estate private equity firms hinge on the performance of their selective agents. What’s more, those agents are often compelled to make big decisions with your money because their managers and agents are held to such strict financial growth goals.
All it takes is a few bad decisions on the part of your real estate private equity firm’s managers to lose massive sums of money. And unlike a public company, a private equity firm is under no obligation to compensate you for that loss. This is precisely why you only want to work with experienced Private Equity firms.
High bar for entry
When you set your sites on a publicly-traded real estate company like a real estate investment trust, all you need to get in the game is the cost of a single share. That’s not the case for a real estate private equity firm. Because they’re not public-facing, private equity firms can choose who is allowed to invest with them. Typically, that means plunking down a substantial sum of money for the privilege of stepping to the table.
Put simply: if you’re just starting out in real estate investment, a private equity firm is likely not for you. The enormous cost reserves this echelon of investment for seasoned investors.
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When you’re working with a qualified real estate private equity firm, you’re putting your money in the hands of real estate professionals with a proven track record for profitable decisions. More often than not, that means when you invest your money, you will not be invited to help in the decision-making process. In a public company, unitholders are afforded the chance to voice their opinions at regular meetings. The larger the stake you hold in a company, the more influential your voice.
Find the right firm
For those investors with the capital and the ability to cede control, a real estate private equity firm can be an excellent source of income. You just have to find the right place to invest your money. Here are some tips:
Choose a specialist
Several significant financial firms across Canada dabble in real estate private equity as one aspect of their overall business. Other firms are entirely focused on private equity investments across a wide range of markets. When you’re investing, make sure to put your money with a business specializing in real estate private equity. That will increase the odds of success.
Understand the costs
The general rule of thumb for private equity investors is that membership in the firm costs a small percentage of the capital you’ve invested. This fee pays for salaries and company overhead. Of course, private equity firms aren’t limited to the costs they can impose. Before you invest, make sure you have a complete picture of the fees associated with doing business.
Because of the high entry costs into a real estate private equity firm, fledgling investors may be tempted to put in as much money as possible. In fact, it’s a good idea to exercise caution when investing with the right firm. Remember, you can always invest more money later.
In addition to those considerations, make sure to do your due diligence when hunting down a real estate private equity company. Look for a track record of success, and focus on a company operating in or around your area.
Who to call?
We recommend you call a Finance Manger that works with and understands the differences between the private equity firms. Each firm has their own policies and expected returns. An experienced Finance Manger will shop around and find the best firms to partner with.
What REALLY is Private Equity? What do Private Equity Firms ACTUALLY do?
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