Private Equity Real Estate
Private Equity Investment in Real Estate
Private equity investment in real estate has increased in recent years, here is an overview of private equity real estate:
Private equity real estate is a sometimes risky, but often lucrative investment area that has become increasingly popular in the last few years. Private equity real estate typically involves a private equity firm collecting money from investors to create a private equity fund, which then looks for potentially profitable real estate to purchase. The private equity fund creates a portfolio of real estate investments that the fund manager believes will be relatively low-risk while still lucrative.Private equity real estate funds three major investing strategies:
- Core-Plus: This strategy is generally low risk with low returns. The Core-Plus strategy involves investing primarily in core properties, with a small amount requiring some form of enhancement.
- Value Added: This strategy usually generates higher returns than Core-Plus, but carries greater risk. The idea is to buy property, make some improvement on it to raise the property's value and then sell it at a higher price than originally purchased. Value-added improvements range from solving management/operational problems, physical improvements, or solving capital constraints.
- Opportunistic: This approach is generally the riskiest, but sometimes the most profitable. The opportunistic strategy usually involves investing in properties that require a high degree of improvement and other more risky potentially profitable real estate investments like raw land and niche property sectors.
- High Entry Fee: Due to the substantial amount of capital needed for investing in real estate many funds require very large minimum investments.
- Low Liquidity: Private investment in real estate requires investors to have limited access to their money because it is locked up in long-term investments. Some real estate investments can last more than ten years while the property is improved.
- Volatility: As recent failures in the housing market demonstrate, the real estate market is subject to both boom and bust cycles. For investors the real estate market is sometimes incredibly profitable but there is also a high degree of risk as housing prices can fall and the fund can fail.
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