What is Real Estate Private Equity?
Real estate private equity is simply buying and managing commercial property. As you can guess, this means it’s an investment strategy in which the investor owns a stake in commercial properties. The objective is to make money by renting out these spaces at a profit. By leveraging the expertise of their employees, investors often buy real estate with certain income prospects to meet their objectives.
Real estate private equity (REPE) is an alternative to public real estate investments, such as real estate ownership and development company shares. There are four types of investible assets: development rights, tax credits, tangible property and flow-through investment opportunities.
Private equity is a strategy that allows you to invest in the growth and profitability of other businesses. This could be accomplished by owning interests in a company or through direct investments into business ventures at early stages of the products’ lifecycle. Private equity investors seek profits from the business’s future successes before those profits are paid out through dividends or increased share value.
When the equity is paid out, the investor is left with a return of capital (ROC) not an ever-increasing share of corporate assets. This model allows private equity investors to make money by investing in growing businesses at their early stages. Conservative investors can use this process to gain an appreciation for the value of firm assets over time.
Private equity funds may take many shapes, each with its own advantages and disadvantages. Private equity funds can take two basic forms: real estate investment trusts (REITs) and private investment funds (PIFs).
REITs are publicly traded companies that invest primarily or exclusively in real estate projects through taking increased ownership in commercial, industrial or residential properties.
Private equity funds, on the other hand, are only available to high-net-worth individuals and institutional investors. In other words, REITs allow you to invest in properties through a publicly traded company. Instead of going directly into a specific property or portfolio of properties, you invest in a REIT that gives you the ability to diversify your investment and realize significant gains through leverage.
REITs can be publicly traded but still have a higher risk profile than conventional real estate investments due to extensive borrowing and lack of operating control. In order for REITs to compete with private equity funds, many REITs have developed close relationships with institutional investors by giving them direct access to REIT management by selling them preferential stock. This approach is called sponsored REITs.
Many REITs also offer private investment funds. Unlike many private equity funds, these investments cannot be sold to the general public because of the lack of financial and operating information available for investors, and because of the high costs and large number of investors associated with listing on an exchange.
Development rights provide investors with potential for capital appreciation by acquiring residential or commercial properties at depressed prices through foreclosure sales or through development rights financing strategies. This allows you to capitalize on strategic acquisitions that allow you to assemble land packages in urban areas targeted for redevelopment, such as brownfield sites and eminent domain cases.
A tax credit is a group of special provisions to encourage certain activities. The benefit of the tax credit is that it can be used as an immediate offset against gross income (unlike depreciation, which can’t be claimed until after a project has been completed and revenue has been received).
This type of investment generates profits by purchasing properties that qualify for low or no capital gains rate and then selling them at a profit after the tax credits have been claimed. The investor’s payoff results from the appreciation in property value plus any gain attributable to the tax credits.
Investors buy residential and commercial properties, such as apartment buildings, hotels, motels and office buildings at below market prices to create value through rehabilitation or conversion.
Long-term capital gains taxes are deferred for up to eight years, resulting in a significantly lower effective tax rate. These tax benefits are attractive to investors who plan to hold the property for at least one year after the rehabilitation has been completed.
While tangible real estate constitutes only about 5 percent of investment portfolios, this relatively small investment class has generated disproportionate returns over the past ten years. This is primarily attributable to the use of leverage, which creates higher returns than either equity or debt investments. The increases in asset values have generally lagged behind developments, creating substantial appreciation potential during the course of an investment period.
When you buy an investment opportunity, the main concern is the amount of return your investment will generate. In many cases, investors have to wait for a period of years before they get paid their initial capital back.
Flow-through investments are commonly made by real estate private equity funds and real estate trusts, which invest in income generating properties that have little or no tangible value. The income from these properties is then used to provide a return on capital to fund future projects or investments in other real estate. This ensures that return of capital is certain and the number of transactions does not diminish a portfolio’s ability to pay out gains across a range of market cycles.
The key to investing in real estate is to focus on the right strategy for you. The best strategy will always depend on your particular situation, but it is important for investors to understand that all investments are not created equal. Put another way, there is no single best investment strategy.
Throughout history, real estate has consistently outperformed most other asset classes. This is due to the fact that real estate does not require an investor to make a long-term commitment or endure significant risk. Real estate investors can realize double-digit returns over a sustained period of time by investing in well-conceived projects with strong risk/reward ratios.
The idea of Real Estate Private Equity is relatively new, exciting, and disruptive in its approach. It’s an appropriate description of the industry in which it operates. Rather than going through a rep or broker, who may or may not be working with a buyer that wants to buy your property, you can work directly with a capital partner—often called a PE firm—to list your property on the market for sale. It’s almost like cutting out the middleman and doing it through agents or individuals. The benefit there from not having to pay commissions from what they make on airbnb rentals—which means you will be able to make more money offselling your house. Knowing how to set up your real estate business to attract PE investors is the tricky part of the business. Fintalent, the hiring and collaboration platform for tier-1 Strategy and M&A consultants has available an expert pool of Private Equity and Real Estate consultants that can set up your business to take advantage of the growing investment opportunities in the real estate sector.