What Is Real Estate Private Equity?

May 18, 2023

An investor holds a note pad that reads “property value” on their work desk, next to a calculator and financial graphs.

Real estate investment comes in multiple shapes and sizes. Buying a house to live in can be a form of real estate investing if you plan to sell the property for a profit in a few years. However, it can be harder to get into high-value real estate as an individual. How can someone invest in commercial real estate or multifamily properties without a lot of existing funds? 

One option to consider is private equity real estate, which allows you more flexibility in both how and where you invest your money. Learn more about this option, the potential barriers to entry, and the risk-reward balance that comes with it. 

Investing in Real Estate Private Equity

There are many reasons to consider investing in real estate private equity. Even when the economy is turbulent, there will always be a need for rental properties, buildings for local businesses, warehouses, and other structures. Real estate is often considered a low-risk investment, and private equity is a subset of it.  

Here’s how it works. A group of professionals forms a fund and seeks out potential investments that could potentially have high returns. These experts assemble a diverse portfolio where each investment has different levels of risk and reward. The increased diversity reduces the overall risk levels. The fund managers then seek out potential investors to buy into the portfolio. These investors can range from private individuals to university endowments and company pension funds.  

Not all forms of real estate investing are accessible to the general public. Only accredited investors are allowed to participate in private equity real estate. Oftentimes, fund managers will send personal invites to investors who they think would be a good fit.

How Real Estate Private Equity Works

It helps to understand how real estate private equity (REPE) firms work before you invest in them. This will give you a clear idea of exactly where your money is going and why it should turn a profit. 

A real estate private equity (REPE) firm can be involved in different parts of the real estate process. The firm might:

  • Invest in potential properties that haven’t been built.
  • Purchase existing properties and take over their management. 
  • Acquire properties and replace the current business with another. 
  • Resell properties for profit. 

Most REPEs usually have a mixture of properties that are at different points of this cycle — thus reducing the overall risk of investing in the fund in the event that one property doesn’t pay off. For example, a REPE might collect rent from various properties each month and take a hands-off approach to management. These are low-risk investments. However, it might be in the process of acquiring a new property with the goal of making it profitable, which is a higher-risk part of the portfolio. 

Types of REPE Investments

Along with selecting a private equity real estate firm that has a diverse portfolio, you can choose a fund that has different levels of risk. Make your choice based on your personal comfort level and your overall investing goals.  

  • Core: A stable, low-risk fund to consider. Core funds are often comprised of multifamily property investments because demand for housing is unlikely to decrease, thus creating reliable cash flow. 
  • Core plus: Comes with the security of a core investment with a few added risk and reward opportunities. There might be some value-added properties that have the potential to drive positive results.  
  • Value added: A riskier investment option. Investors are actively buying properties and working to improve them. Investors need to have faith in the redevelopment plans and resale potential to choose value-added funds.
  • Opportunistic: The highest-risk option. The fund managers choose properties that are risky but have the potential for high returns. There might be some low-risk properties in this fund just to hedge against certain purchases.

Some people have long-term investing goals and simply want to invest in a core fund over a long period of time. However, other investors are willing to take a risk in exchange for the potential of high returns. 

Advantages of Real Estate Private Equity

There are several distinct advantages of opting for private equity real estate. A few include: 

  • There are opportunities to diversify within the field: The fund managers will try to build a diverse portfolio, which reduces the overall risk of investing. 
  • Real estate is considered an inflation hedge: Consumers can impact the economy with fears of inflation or a potential recession. However, rental values often rise during this time. 
  • There is minimal work for investors who buy in: You can let the experts take over the vetting, investing, and liquidation process. Their job is to drive results, your job is just to buy in. 
  • Investors can enjoy passive income: You might be able to benefit almost immediately from certain real estate investments. 

If you’re looking to diversify your investments and don’t want to spend a lot of time worrying about where your money is, working with a REPE firm might be the right call for you.

Risks and Limitations

While it’s possible to seek out low-risk REPE firms, there are always drawbacks to different types of investing. Here are a few risks to consider as you decide to invest in real estate — particularly through a private equity lens.

  • The market may be unpredictable: As many people saw with commercial real estate during the COVID-19 pandemic, a seemingly valuable asset can become a risk overnight.  
  • This form of investing can be hard to break into: New investors and unverified investors might not have the option of working with REPE firms. These funds are often invite-only and restricted to specific types of investors.  
  • You don’t have control over the investment: You can’t manage which properties the REPE firm invests in and you have no control over how they manage their investments or try to improve them. This is a hands-off form of investment, so you need to trust the firm you work with. 

You can see how an advantage for some is a drawback for others. Not everyone wants to be involved in the portfolio development process but some people think this is an important part of investment management.

Alternatives to REPE Funds

A REPE fund isn’t the only option for people who want to invest in real estate. There are multiple ways for people to diversify their real estate portfolios or enter the investment field without a large amount of capital.

Mutual Funds or REITS

Real estate mutual funds could be good options for investors who are not accredited or who don’t have an invitation to a REPE firm. These channels work like standard mutual funds: the managers assemble a diverse portfolio to mitigate risk and the investors buy into these funds to support the properties. 

Real estate mutual funds are often made up of real estate investment trusts (REITs). These are organizations that either buy properties or fund mortgages to profit from the interest. A mutual fund might invest in several REITs, which in turn invest in different types of real estate. This diversification makes mutual funds a low-risk option.

Real Estate Syndications

If you’re looking for a more direct, hands-on investment, consider real estate syndication. With this option, a group of people invest in a single property and manage it over time. Syndication groups usually invest in commercial properties or multifamily houses. In this case, you’re making a single investment but the burden to drive returns isn’t only on you.

Boutique Investment Firms

Instead of working with a large firm that handles investments across the country (or globe), you might consider working with a boutique firm that targets a specific area or niche. These firms also might be more open to working with you than large REPE firms. 

These firms sometimes offer more perks than their larger counterparts, including higher performance levels, qualified investors, and more attention to you.

Deciding Where To Invest in Real Estate

Regardless of whether working with a REPE firm is right for you, continue to practice due diligence in how you invest. Understand your comfort levels with risk and set clear and realistic goals for what you hope to get from your investments. Always look at a firm’s past performance and portfolio before investing and keep a trusted financial advisor on hand who can answer any questions you have.