Should You Invest with a Private Equity Fund, Syndication, or Other Professional Investors?

There are dozens of benefits to investing in real estate, such as appreciation, high returns, and tax benefits; however, not everyone is in a position to acquire real estate on their own. There is an alternative though:  Investing in REIT’s, real estate funds, syndications, or private equity funds.

What are Alternative Investing Strategies?

Before we delve into the details, let’s look at what alternative investment options are out there:

  • REIT (Real Estate Investment Trusts): REITS are companies that invest in, own, or operate income-producing real estate. They tend to invest in a particular asset class. REIT’s provide investors the opportunity to own valuable real estate via the purchase of individual company stock or through a mutual fund or exchange traded fund; this strategy provides investors steady dividends, high returns, liquidity, and lower volatility compared to tradition stock investments.
  • Syndications: A real estate syndication is when property investors come together to invest in a particular project (either one asset or a portfolio). These projects are led by the syndicator and the ownership is held in a corporation, limited partnership, limited liability company, etc.  Typicaly, the syndicator is responsible for the identification, acquisition, and management of the asset, while the investors involved received passive income.
  • Real Estate Funds: Real estate funds invest primarily in REIT’s and other real estate operating companies. Similar to investing in mutual funds, investors are provided a more secure investment. The portfolios are generally diversified and provide investors growth via appreciation.
  • Private Equity Real Estate Funds: Similar to that of investing in real estate funds, private equity funds differ slightly because they require a large amount of upfront capital as well as usually invest directly in property. Investors are required to commit to a longer-term investment, where there is limited flexibility and liquidity. The benefit is a higher return; however, this can be riskier because an underperforming fund can result in a complete loss. These funds are also structured in limited partnerships, private REIT’s , LLC’s, S-Corps, etc. 

These avenues allow individuals to put their investment into the hands of the professionals.  Although there are no guarantees in the individuals return, the risk is reduced because a professional has the experience and expertise to make educated decisions. As an individual investor, there is a learning curve, and removing this can help improve one’s position. Outside of lack of experience as an investor, investing with professionals provides three alternative benefits that differ from investing independently. 

Benefit #1: The Professional Will Find the Deal

There are hundreds of deals that are posted each day, and hundreds more opportunities in what we call “off-market” deals (deals in which the property owner is willing to sell, but does not want to take it out to market). The surplus of inventory can be overwhelming to a single investor, especially when investing is not their full-time job. Additionally, for every deal that an investor considers, they will underwrite it themselves. This again can be time consuming and after hours of investigation, can often result in no deal to be identified. These challenges make investing with a professional optimal because private investors do not have to conduct the due diligence on each deal. Instead, they can trust the firm or fund with similar goals that they invest in to do the hard work while they reap the financial rewards.

Benefit #2: There Will Be A Team Working for You

Managing your investments is running a business, and there are few scenarios in which a landlord is a true passive investor as the sole owner of a property. As a result, there are dozens of challenges a landlord will face while managing their portfolio – these can include changes in governing laws, vacancy issues, and market shifts in trends. Each challenge presents a new situation in which an investor must navigate to ensure that their portfolio maintains positive cash flow.

However, when investing with professional services, these challenges can be minimized, if not removed all together. This is because the fund is being managed by professionals who have in-depth knowledge of how to cope with changes. In essence, when investing with a professional, you as an investor have a team working for you and watching out for your best interest, because at the end of the day, for the fund, syndication or REIT to profit, the investors must as well.

Benefit #3: There Will Be Fewer Limitations

As a private investor there are limitations when investing in real estate. First off, the amount of capital you have to get started can largely impact your investment strategy. Your initial investment will be placed toward your down payment; and, depending on how much you wanted to leverage the property, your purchase price will vary accordingly. Additionally, with limited capital, your potential inventory will be limited as well. 

Secondly, you will be confronted with loan limitations. This can impact the required down-payment, interest rate, and terms that the lender offers you. Your history and income can drastically impact your opportunities.

Both of these can be avoided by investing via the methods mentioned previously.

The Disadvantages…

The aforementioned benefits can be attractive to any investor. It is important to understand that this strategy presents its own disadvantages as well. The primary difficulty is that the investment will be out of your hands – that is, the control will be held by others. This inhibits your position because you will in most likelihood not be provided the opportunity to sell or refinance when you may prefer. Secondly, by handing the responsibility to another individual or company, you are reducing your understanding or learning of part of the process. The third disadvantage is that you are placed in a position where you are investing in a company or a person more than the real estate itself. Since you are really placing your bet on the success of the portfolio manager, then that is where more of your due diligence is done. Lastly, you may be losing money – The fees of each professional service can vary and they can have a dramatic impact on your bottom line.

The strategy that any investor decides to pursue depends on their interest in involvement, desired return, and the risk they are willing to take. There is no one correct strategy; instead, each investor should clearly outline their goals and identify the strategy that best fits their needs.



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