Investing in real estate is often high-risk, high-reward due to rapid, unpredictable market fluctuation and limited liquidity. Savvy investors can mitigate these risks by utilizing strategic asset classes and maintaining a long-term mindset.
One such strategy to make real estate investment a highly profitable venture is by establishing private equity real estate funds. Here, we’ll explain the definition of this investment strategy to help you discover if this opportunity is right for you.
Defining Private Equity Real Estate Firms
Private equity real estate firms obtain private and public investments to create an asset class, or a grouping of investments that behave similarly in the marketplace and are subject to the same laws and regulations. Private equity in general has a broad range of subcategories, from venture capital to leveraged buyouts. In the case of real estate, private equity typically refers to value-added and opportunity funds.
Outside investors known as Limited Partners (LPs) raise private equity real estate funds. LPs can include, but are not limited to, high net-worth individuals, insurance firms, institutions such as nonprofit or pension funds, and private accredited investors.
Private equity real estate firms first became popular in the 1990s, when dropping property values allowed real estate investors to acquire larger amounts of property than normal. Private equity real estate funds often focus more on commercial property rather than residential property. Typical commercial properties targeted by private equity real estate funds encompass shopping centers, offices, multifamily apartments, and industrial complexes.
Why Use Private Equity Real Estate Funds as an Investment Strategy?
Private equity real estate funds have several clear advantages compared to other investment strategies.
- Tax benefits. Limited partners may see tax benefits by investing in private equity real estate funds. This form of investment, unlike stock dividends, only taxes the investor for profits made, which in turn avoids double taxation. Any income the investor receives from this form of investment is in distributions, which is often classified as capital gains and is thereby nontaxable.
- Low risk. While real estate investment is often seen as risky, in this situation, LPs run a limited risk. While the executives of private equity real estate firms may run the inherent risks of property investment, LPs avoid their personal assets being held under liability. If the firm becomes insolvent, an LP’s assets are safeguarded. On top of this, LPs have no managerial burden.