Private Equity Real Estate Investment

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Issues Related To Specific Terms

Carlyle Group’s Sarah Schwarzschild on Real Estate Private Equity, Advice to Women

There are a variety of terms related to private real estate investments that are important to consider. A partial set is included here but not covered in depth. Often, an investors advisors and attorney will be well-positioned to evaluate these items for a specific investment, and provide guidance on what is typical and reasonable. At a minimum, it is advisable to know the terms for each of these items in a proposed investment so that the decision to invest can be made with a complete picture.

Of course, this is only a partial list, and there are a variety of issues that will be specific to certain types of investments, sponsors, or structures. Ultimately, its the holistic view of the investment that needs to make sense.

The Real Estate Private Equity Acquisitions Associate Salary

Compensation structure is generally structured similar to traditional private equity heavily weighted towards bonus, though compensation within real estate private equity tends to be more highly variable than traditional PE.

At the junior level, base and bonus are all cash, while at mid-to-senior levels, compensation typically includes a carried interest component.

A first-year acquisitions Associate with investment banking experience should expect a base salary in the range of $90,000 $120,000 depending on location and firm size, and a year-end bonus that is approximately $100% of base pay, bringing the all-in compensation for most first-year acquisitions Associate will range between $160k $230k.

At many firms, base salary doesnt often increase meaningfully year-to-year, but bonuses can grow from 100% to as much as 200% in a few short years.

As you go further up their real estate private equity hierarchy, compensation grows similar to traditional PE:

At many firms, base salary doesnt often increase meaningfully year-to-year, but bonuses can grow from 100% to as much as 200% in a few short years.

Question Category #: Specific Sectors: Multifamily Office Retail Industrial And Hotel Properties

What are the main financial differences between multifamily properties and office, retail, or industrial properties?

The pro-forma numbers tend to be lumpier for office, retail, and industrial properties because they have fewer tenants with more customized leases, and there are often long periods of downtime in between tenants and significant concessions when new tenants move in.

Capital costs such as Leasing Commissions and Tenant Improvements are also far more significant, which reduces cash flow for these properties.

These items are much lower for multifamily properties, but unit turnover is much higher, and they may have more staffing and sales & marketing needs as a result.

Also, rent, occupancy rates, and expenses for multifamily properties tend to change much more quickly if theres a downturn because the leases are short-term.

Walk me through a hotel pro-forma.

Revenue split into Room Revenue, Food & Beverage, and Other, which includes fees from Parking, Telecom Services, and Events.

Then, there are Departmental Expenses that match the revenue categories, Undistributed Expenses for items that dont match revenue categories, such as Sales & Marketing and Repairs & Maintenance, and Fixed Expenses, such as Insurance and Property Taxes.

NOI = Revenue Departmental Expenses Undistributed Expenses Fixed Expenses, and then you subtract Capital Costs to get Adjusted NOI.

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Pros Of Private Equity Real Estate Investing

The most tangible and obvious benefit of private equity real estate for individual investors is the upside. If you can afford the buy-ins, you not only have direct ownership of the asset , you participate fully in the profits generated by the asset. The size of your buy-in only increases the potential returns.

If your private equity fund manager chooses quality assets and manages them effectively, you can reap incredible profits in a short time period on private equity deals. As long as the fund holds the asset for more than one year, your capital gains exposure is limited, or you can defer your tax exposure by investing with a self-directed IRA. In the meantime, youll have access to passive income.

Additionally, private equity funds are usually highly diversified across several types of properties in different asset classes. Along with the upside potential and passive income, the investor can get equity in a number of different assets for a low price in comparison to scouting them out and buying them individually.

What Is Private Equity Real Estate

Private equity firms and developers together again  with a twist

Private equity real estate is an alternative asset class composed of professionally managed pooled private and public investments in the real estate markets. Investing in private equity real estate involves the acquisition, financing, and ownership of property or properties via an investment fund.

Private equity real estate should not be confused with an equity real estate investment trust, or equity REIT, which are publicly-traded shares representing real estate investments whose revenues are mainly generated through rental incomes on their real estate holdings.

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Real Estate Acquisitions Vs Asset Management

Within real estate private equity, there are two distinct roles: Acquisitions and Asset Management.

Theyre separate teams at some firms, while others combine them.

Others separate them at some levels of the hierarchy but combine them elsewhere.

The Acquisitions team pursues and analyzes deals, negotiates them, set up the financing, and convinces the decision-makers at the firm to invest in properties.

The Asset Management team executes the business plan that is put in place once the REPE firm has acquired a property. Team members improve the propertys operations and financial performance and fix problems that come up.

The pay ceiling is higher in Acquisitions because the perception is that its harder to execute deals than it is to manage properties.

Asset Management is sometimes viewed as more of a cost center that gets blamed when deals go poorly, but which also doesnt receive full credit when deals go well.

However, Asset Management is more stable in terms of compensation and career path because firms always need to manage their properties even if theyre not doing many deals.

What Are The Differences Between Direct And Indirect Private Equity Real Estate Investing

When an accredited investor wants to allocate funds to CRE they can choose to make a passive equity investment into commercial real estate through a fund or into an individual real estate asset.

A fund builds a diversified portfolio by investing in multiple properties. With a single investment you gain access to a professionally managed portfolio of commercial real estate assets. Single-sponsor Funds are led by one real estate firm and focus on the firms specialty which can include a particular region or a specific asset class like office or industrial properties. You end up with diversified holdings as they fill the fund with real estate assets over time.

You can also choose to make passive equity investments directly into individual assets. You are investing directly into the equity of a project of your choosing, not a fund that picks the assets for you. As a passive investor your leverage the power of the syndication and join dozens of other individual investors to contribute to the equity stack in a real estate purchase. Unlike a fund you maintain discretion and get to choose what properties you will invest in and how much you will invest in each asset.

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Gain A Truly Passive Income Stream

After selecting a fund subsequent to an extensive research process on private equity firms and their deals, you can sit back and let your money work for you. In one decision, you can hire a team of experts to grow your wealth and simultaneously eliminate handling early-morning maintenance calls and chasing late rental payments.

How To Invest In Private Equity Real Estate

Raising Capital For Real Estate Private Equity – Bronson Hill 2022

    Private equity real estate funds allow high-net-worth individuals and institutions like endowments and pension funds to invest in equity and debt holdings in property assets. Using an active management strategy, private equity real estate takes a diversified approach to property ownership. General partners invest in a variety of property types in different locations. Ownership strategies can range from new development and raw land holdings to complete redevelopment of existing properties or cash-flow injections into struggling properties.

    Here is a look at how investors can participate in private equity real estate, and an overview of the industry’s opportunities, risks, and restrictions.

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    Who Should Invest In Private Equity Real Estate

    Private equity real estate is best for accredited investors with a lot of capital they can tie up for many years. However, suppose you’re looking for a way to diversify a large amount of capital and have all other financing taken care of, including retirement funds and other financial goals. In that case, letting your money grow in private equity real estate can be a good option.

    Difficulty Learning About Investments And Comparing Them

    One of the best things that ever happened to the mutual fund industry is a company/website called Morningstar. You can go to Morningstar.com and in just a minute or two find out the track record, fees, and holdings of any mutual fund you want. You can compare them one to another very easily and very quickly. That is not the case with private real estate investments. Every investment is unique. There is no central database of information. You can never really be sure you’ve found the best investment. To make matters worse, a particular investment is often only available for a short period of time, and then never again. Yes, you can look at the operator’s track record, but you can’t look at the track record for a given investment because it doesn’t have one. So you’re forced into this bizarre universe of googling information, going to conferences, talking to other private real estate investors personally or in online groups, etc. And of course, conflicts of interest abound as most of the people telling you about an investment have a conflict of interest. This factor is so bad I feel compelled to routinely tell my real estate investing newsletter readers that these are introductions and not recommendations any time I tell them about an investing opportunity.

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    What Is An Accredited Investor

    Investors are not only individuals. You can invest via an LLC, a joint venture, or a trust as well but each of those entities has different accreditation requirements, and the SEC updates them periodically. The requirements for accreditation are set by federal regulations, not individual firms.

    After accreditation, private equity fund managers typically walk investors through a series of legal disclosures. Once all that paperwork is in order, investors are put in the queue for their capital to be called up and invested.

    Question Category #: High

    Functions And Roles Of Private Equity Firms  Photodrole

    Why real estate? OR Why would you invest in real estate?

    Its a very tangible asset class thats rooted in real cash flows, not pie-in-the-sky future assumptions, and it combines financial analysis with real-life, on-the-ground knowledge. Its also one of the oldest asset classes and will likely be around in some form forever.

    For investors, real estate combines elements of Equities and Fixed Income and allows for strategies that are somewhere in between them, or even above/below them in terms of risk and potential returns.

    There are also many investment options, from individual properties to loans to REITs to real estate funds to crowdfunding, and they all have their benefits and drawbacks.

    What are the main property types, and how do they differ from each other?

    The main categories are office, industrial, retail, and multifamily properties.

    Office, industrial, and retail properties have businesses as tenants and offer long-term leases of 5-10 years. The lease terms are highly variable and often include different rental rates, rental escalations, free months of rent, expense reimbursements, and tenant improvements.

    Industrial properties can be built more quickly and cheaply and tend to have fewer tenants, while office and retail properties take more time and money and tend to have more tenants.

    Multifamily properties have individuals as tenants and offer short-term leases , with very similar terms for all tenants.

    What is Net Operating Income ? What about Cap Rates?

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    The Top 10 Real Estate Private Equity Interview Questions

    Because Real Estate Private Equity is viewed as a niche segment of the private equity world, firms are focused on hiring people who have a real interest in the world of real estate.

    Because of this, the first and biggest red flag is always they dont actually seem interested in real estate make sure you know your why.

    Senior Associates and Vice Presidents are often tasked with asking technical questions, while Senior Vice Presidents and Principals usually try to understand a candidates background to identify what their strengths and weaknesses are.

    In my experience, my technical capabilities have largely been tested on the modeling test and in-person interviews have tended to lean more towards how you think about real estate, ability to be organized and manage deadlines , and my desire to do the job.

    To the original point about red flags, youd be surprised how many people dont get the job because they simply didnt seem like they wanted this job.

    Unlike investment banking interviews, REPE interviews , tend to focus less on technical finance interview questions and rely on the modeling test and case study to confirm youve got the technicals down.

    So if you are comfortable with the following 10 questions , youre well on your way to acing your interview.

    Why real estate?

    What are the three ways of valuing real estate assets?

    Compare the cap rates and risk profiles for each of the main property types.

    Walk through a basic cash flow proforma for a real estate asset.

    List Of 3 Private Equity Real Estate Investors In Europe

    European private equity investors in the real estate business are characterized by their broad investment profile and rather high risk profile. In the following we introduce three relevant investors from our list.

    1. EQT

    The Swedish private equity investor EQT invests through its EQT Exeter division. The focus is on value-add investments. Examples include the Concept project in France and the acquisition of Stendörren, which invests in urban logistics and light industrial properties in the Stockholm area.

    2. AURELIUS Real Estate Opportunities

    The real estate arm of the Munich-based private equity investor AURELIUS Real Estate Opportunities invests in residential, light industrial and corporate real estate. In PE style, the focus is on special situations. A manage-to-core approach is used to achieve improvement potential. Properties are purchased in European markets from a purchase price of EUR 3 million.

    3. Heitman

    The US private equity investor Heitman LLC manages over USD 46 billion. In the real estate sector, investments are made in three areas: Private Equity , Debt and Public Equity . In private equity, the focus is on core, value-add and opportunistic strategies.

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    How Much Do Real Estate Private Equity People Make

    An analyst at real estate private equity earns between $100K $150K with no carried interest due to being the most junior position. That number for associates ranges from $150K to $250K, depending on firm size and personal performance, though carry is still unlikely. Vice presidents can make $300K $500K annually, with some additional carry.

    Principals earn between $450K-700K, with additional carried interest. Partners can make up to $1 million, with carried interest in the multiple of that number, or nothing at all. They earn so much carry because they put their own money into the investments.

    REPEs pay is highly variable among firms, and tends to be performance-based. Closing more deals and bringing more cash for the firm means you get paid more, and vice versa.

    Heres a table to sum up everything:

    Level
    $700K $1MN/A

    If you want to know more about private equity salary and how carry is distributed, visit BankingPreps article here

    What Are Real Estate Investment Firms

    Real Estate 2021: Investment Trends And Forecast | The Property Show

    If youve ever purchased a single family home, you are likely already familiar with the parties involved in real estate: You have the seller , the sales agents, and the mortgage lenders. To the extent there are professional investors in the real estate process, theyll be either flippers or developers who recently built or renovated a home and are now selling.

    However, once you move up the ladder towards large scale multifamily projects or commercial developments, the buyers and sellers are not individuals, but are large institutional real estate investors and developers.

    This guide was written to give you an understanding of the types and roles of real estate companies involved in real estate investing on the larger, institutional scale as you explore career options within real estate.

    In This Article

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    Private Equity Real Estate Vs Reits

    Theres an important distinction to be made between private equity real estate and public real estate investment trusts . Public REITs are essentially publicly-traded stocks of existing real estate companies. Shares of REITs can be purchased and sold with the click of a button. Private equity real estate is much more illiquid. It can often take years to return initial capital contributions and profit to private equity real estate investors.

    This is one of the reasons why private equity real estate limits those who can invest. Compare this to REITs, that allow any investor with a brokerage account to buy or sell shares. REITs are continuously raising capital whereas funds tend to be more limited in when they are open, usually with a specific fundraising goal outlined in advance and deadlines for when funds can be accepted. Another key differentiator is that private equity real estate funds tend to be less highly regulated than public REITs. For example, REITs must comply with strict requirements regarding the percentage of real estate-related assets they own, how they pool capital and from whom, how and when dividends are distributed to investors, etc., whereas private equity funds are free to decide entirely for themselves how they will be operated provided their investors are in agreement.

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