Real Estate Private Equity Advice from Expert Attorney

Real Estate Private Equity is a special type of private equity that involves acquiring and financing properties via an investment fund. Generally, private equity investment involves buying and managing a company before selling it.

How Does Real Estate Private Equity Work?

It is worth noting that real estate private equity is an attractive alternative investment for many real estate investors.

Here is how it works: after identifying a property with good profit potential, a firm pools funds from outside investors to acquire and develop the property for a short period before flipping it.

The option allows participation from investors that would have been unable to execute such projects on their own.

However, it is an investment reserved for high-net-worth individuals. Depending on the property’s value, the firm may demand a minimum of $250,000 or millions from each investor interested in the deal.

Eligibility

There is no clear-cut law regulating private equity real estate funds. Nevertheless, firms specializing in such investment majorly allow funds from institutions like endowments and pension funds.

For individuals to be considered, they must have an asset of at least $1 million (excluding their primary residents). Or a yearly income of at least $200,000. 

Private Equity Real Estate Investing Is Not Risk-Free

Private equity real estate investments attract investors because properties are more likely to appreciate than depreciate. Investors are entitled to a portion of any income or profits from the investment, which can be substantial. 

Despite these pros, private equity real estate is not risk-free like any other investment.

Asset-Level Risk

Different real estate properties come with their peculiar risk. The performance of commercial real estate properties, for instance, can be affected by global economic events such as a pandemic and inflation. 

These events can force many office and retail tenants to close down or be unable to pay their monthly rent, as seen a few years ago when more than half of minority-owned small businesses disclosed they had trouble paying rent. The same is true for leisure and hospitality properties.

Liquidity Risk

Real Estate Private Equity is considered a long-term investment. Unlike the securities market, where you can easily buy and resell your stocks and bonds, selling a real estate property can take months or even years. 

The investment may also take a while before it starts generating any profit, especially if it is an old building that needs lots of repairs after purchase. This is why many private equity firms expect investors to leave their funds with them for at least four years or more before expecting any returns.

Replacement Risk

Tenants’ and property buyers’ tastes tend to change over time. When this happens, the property may experience a lesser occupancy rate. 

To catch up with market demand, a real estate private equity firm might need to upgrade the property’s features to make it desirable to renters or buyers again. 

This additional expense could significantly reduce the profit margin on the investment.

Before investing, ensure you do personal due diligence to determine if the investment possesses the profit potential claimed by the firm. If it is not, there are always better investment opportunities out there.

Sponsor Risk

The sponsor is the firm in charge of locating, acquiring, developing, managing, and selling the property on behalf of the investors. In other words, the larger percentage of the decision is taken by the sponsor, and if there is an error in their judgment, you risk losing all of your investment.

Always research the sponsor’s reputation and conduct a personal review of the investment to see if it is worth the risk.

Property Specific Risk

These include all risks associated with the property that may jeopardize investors’ funds.

For instance, properties in areas prone to natural disasters like hurricanes risk damages and high maintenance fees.

Purchasing an old house will also require a high cost of repairs and replacement to get it back into a livable state.

S.A. Law Group Real Estate Private Equity Lawyers

We represent investors, real estate funds, real estate developers, and pension fund advisors on the structuring of real estate fund formation, acquisitions and dispositions, financings, and joint ventures.

Real Estate Private Equity (REPE) is a complex transaction that our size and knowledge can efficiently help you to handle.

Call us today at (202)444-4222 or use alternative options on our Contact Us page for free consultations if you have any issues with your real estate private equity investment.

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