At BAI Capital we live and breathe Florida real estate.
Today, we invite you to focus along with us on the many advantages of real estate private equity.
But to start here is the main reason real estate private equity builds wealth:
The real estate limited partnership fund manager is driven by finding the right real estate assets that can produce cash flow over long periods while creating appreciation for both the fund manager and the investors.
So with that, let’s go!!!
REIT’s vs REIG’s vs RELP’s
Sourced from The Fool –don’t be one…
Real Estate Investment Trusts – REITs
If you don’t want to put up with the headache of managing a rental property or can’t come up with the 25% down payment, real estate investment trusts (REITs) are an easy way to start investing in real estate. REITs are publicly traded trusts that own and manage rental properties. They can own anything: medical office space, malls, industrial real estate, and office or apartment buildings, to name a few.
REITs tend to have high dividend payments because they are required to pay out at least 90% of their net income to investors. If the REIT meets this requirement, it will not have to pay corporate taxes.
Additionally, while selling a rental property could take months and mountains of paperwork, a REIT has the advantage of liquidity since they trade on stock exchanges.
Real Estate Investment Groups – REIG’s
Investing in a real estate investment group (REIG) is one way to keep the profit potential of private rental properties while possibly getting more upside than a REIT trading at a premium.
REIGs purchase and manage properties and then sell off parts of the property to investors. A REIG will buy something like an apartment building, and investors can buy units within it.
The operating company retains a portion of the rent and manages the property. This means the company finds new tenants and takes care of all maintenance. Oftentimes, the investors will also pool some of the rent to keep paying down debt and meet other obligations if some units are vacant.
Real estate limited partnerships RELP’s ( BAI Capital)
Real estate limited partnerships (RELPs) are a form of REIG. RELPs are structured similarly to hedge funds, where there are limited partners (investors) and a general partner (the manager). The general partner is typically a real estate business that takes on all liability.
RELPs are a more passive investment in real estate. Typically, the general partner sets up the partnership and recruits investors to be limited partners. Investors then receive a K-1 to report income on their taxes, but they don’t have much influence on operations.
RELPs can be very profitable if you find a good general partner. But you’re relying totally on that general partner who must, without much oversight, manage the property and reliably report financials back to you.
How Real Estate Private Equity Works
Is real estate a good investment? According to Nick Huber, the short answer is, yes! Now, when it comes to structuring a real estate private equity deal, some details need to be considered. Here, I talk about how a real estate private equity firm is structured and give you some more good, need-to-know terminology.
Generally speaking, there are two key sets of players with these kinds of agreements: General Partners (GPs) and Limited Partners (LPs), and in a nutshell, GPs raise money from outside investors–LPs–and are in charge of organizing the details. The GPs goal is to make money for both the LPs and themselves, and there are a variety of ways to accomplish this.
Now, a big thing to keep in mind is what is termed Waterfalls. This is an overflow of money that comes in from a private equity deal, and there when it comes to dividing money for the deal, there are provisions stipulating where this overflow of cash goes: between the common shares and the preferred equity (LPs). In a preferred return this is like an interest rate promised to the LPs, because after all, they are the ones that fronted a bulk of the capital, to begin with. Once that is met, the promote is what goes to the GP.
There are a lot of ways to structure a single deal, and knowing the difference between low-risk and high-risk deals is vital when organizing one, and fees are a major consideration. From Asset Under Management (AUM) Fees to Acquisition and Disposition Fees, all of these generally go to the GP to help them set up the deal for success. Structuring any deal depends on the market and how aggressive or risky a specific deal is, which will also determine co-investing and debt sponsorship.
Real Estate Private Equity Fund vs REIT
5 reasons you shouldn’t invest in a REIT, according to Grant Cardone:
1. Fees to Promote funds.
Private REITs have been notorious for their high fees—and many share 10% with brokers.
2. We Buy Then You Invest.
With a REIT you invest money upfront before the properties are purchased and most of the time you don’t know what property you are invested in.
3. Tax Advantages
With a Real Estate Investment Trust, the investor is invested in a convertible stock certificate, unlike the private equity investment that makes the investor a partner in the property, with the full backing of the real property. In a private equity fund, you are a partner in the property rather than a holder of a piece of paper.
The private equity firm passes all tax benefits on to its investors, including depreciation and capital recapitalization, while REIT payouts are taxed at an investor’s higher ordinary income rate and no depreciation deductions are passed on.
4. Regular Cash Distributions
Private REITs typically pay every quarter whereas a good private equity firm that manages cash flow and is personally invested in the properties is motivated to pay investors out monthly as they are motivated to pay themselves.
5. Private Equity Mentality vs REIT Mentality
The private equity fund manager is driven by finding the right real estate assets that can produce cash flow over long periods and create an appreciation for the fund manager and the investors.
Whereas the REIT mentality is fee-driven whereby they get to keep their jobs and fees are based on trades, not the asset itself.
How Private Equity Real Estate Companies Make Money
Private equity is one of the most lucrative industries out there, and it’s no surprise, says Justin Kivel. When you’re responsible for managing millions, or even billions of dollars on behalf of investors, and you’re able to leverage other sources of capital like debt, private equity firms can control huge assets with a very small portion of their own capital necessary to do it.
And in real estate, this is no different. But how to real estate private equity firms actually make money?
Well, by the end of this video, you’ll know 5 of the most common ways real estate private equity firms make money, and how this is actually a benefit for both the company, and the investors as well.
REIT vs. Private Equity: What’s the BETTER INVESTMENT?
Which of these investments, REIT or Private Equity, will make you the most money? Also, which one is the best fit for YOU? There are many things to consider. In this video, Angelo Christian breaks down the pros and cons of both strategies.
Private equity real estate funds provide accredited investors with several important benefits that are not readily available through other types of real estate funds, including preferred returns as well as tax advantages. For individuals who are seeking exposure to real estate and have at least $50,000+ to invest, this approach is compelling.
The embedded videos above discuss at length the range of options as well as what to look for and expect.
This is our world…
If you want to move into property and have decided this is the right type of investment to diversify your portfolio, contact us today.