Private Real Estate Funds Defined
Private real estate funds gained popularity during the 1990s as property values fell, giving investors new opportunities to acquire real estate without the hands-on management required of traditional ownership. The term is used to describe a class of assets that include pooled investments in both private and public properties. Investors pay money into the fund to build equity for it and so that money can be invested into real estate on an ongoing basis.
These investments are professionally managed and operate similarly to mutual funds because they invest in securities in this case, real estate properties. Private real estate investment funds allow people to access some of the financial benefits of owning different types of real estate without needing to qualify for financing, too.
This isnt a type of investment thats suitable for everyone. For starters, it carries a higher level of risk, and theres minimal liquidity. Investors are usually required to remain committed for several years there may be lock-up periods that can last 12 years or longer, during which you cant sell your share of the fund. Additionally, investors are required to provide a large commitment of upfront capital, with ongoing investments required over time. An initial investment could be a minimum of $250,000 or more.
How Do Private Lenders Work
Private lenders invest their capital into real estate deals in exchange for interest paid on the loan. They will work with investors to establish the loan terms, which will be paid back according to the term. Private lenders are often investors in their own right and turn to private lending to expand their portfolios.
Best Private Lending Companies
Private lending companies will offer the same benefits of working directly with a private lender, though the application and approval structure may look different. There are many personal loan companies and peer-to-peer lending platforms that investors can consider. Here are some of the best private lending companies out there:
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LightStream: This particular outlet offers loans for auto, home improvement and just about anything else, at low rates for anyone who may demonstrate a propensity for good credit.
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Upstart: Upstart is an online lending marketplace that specializes in personal loans using non-traditional variables to determine creditworthiness.
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LendingClub: LendingClub is a peer-to-peer lending company, headquartered in San Francisco, California.
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Citizens Bank: Citizens Bank offers personal and business banking, student loans, home equity products, credit cards, and more.
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Best Egg: Best Egg is a fast and efficient lending platform investors may tap to secure relatively low interest rates.
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But Watch Out For Fatal Flaws
While the holistic view tends to be the best place to make decisions, its important to keep an eye out for fatal flaws in a potential investment. These are issues which in and of themselves change the entire outlook for an investment.
A perfect example in real estate development is a project which has excellent economics, experienced sponsorship, great deal terms, and excellent location and tenancy, but also happens to be located on a contaminated property.
Its not appropriate to score the environmental issue in one section of a review and say that the positives outweigh the negativesthis is an issue that needs to be thoroughly understood and in and of itself can be able to remove an opportunity from the consideration set.
This is just an example, but the point broadly is that a scorecard can help maintain perspective, but shouldnt outweigh further judgment if there are issues that compromise the investment in and of themselves.
How Do Private Equity Real Estate Funds Work
Private equity real estate funds sell limited partnership interests to raise capital for real estate investments. The funds general partner , often referred to as the sponsor, uses investors capital and often borrowings from banks and other lenders to invest in real estate. The sponsor/GP provides some equity, identifies the real estate investment opportunities, manages the investments, and earns fees that are often based on the funds performance. The LPs typically provide most of the equity capital. Buying LP units is a passive investment that offers a preferred return, including return of capital. LP investors typically receive distributions from the Fund before the sponsor does.
There are five categories of private equity real estate funds, distinguished by their risk/reward profiles:
1) Core Offers the lowest risks/rewards, uses little or no leverage and focuses on stable, high-quality assets with high occupancy rates in prime locations. Income from the Funds properties produces a high proportion of the total return, while appreciation is a lesser component.
2) Core-plus Owns high-quality assets in secondary locations, or slightly risky assets in prime locations. Uses moderate leverage up to 50 percent with the goal of increasing the funds internal rate of return .
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Real Estate Crowdfunding For Beginners
For those who are not familiar with real estate crowdfunding, lets go ahead and cover some of the basics.
You might be wondering why all of these platforms are relatively new with limited operating history. This is because crowdfunded real estate is a new investment opportunity that came around in 2012.
The Jumpstart Our Business Startups or JOBS Act passed under the Obama administration. The point of this law was to loosen restrictions on small businesses, particularly by easing securities regulations. Prior to this law passing, it was illegal for companies to use crowdfunding to issue securities.
Now, it is perfectly legal to raise money in this fashion!
Before this law, your options to invest in real estate were slim. You could go the traditional route and buy physical real estate of course, but the upfront costs make this out of reach for most investors. Beyond that, the other options included private deals for accredited investors only or buying into a REIT.
Real Estate Mutual Funds
Real estate mutual funds, like real estate ETFs, own shares of entities that develop and own real estate, as well as shares of REITs. These funds provide investors with exposure to real estate either focused on a segment of commercial real estate, or a wide range at a fairly small level of investment. As with other mutual funds, most real estate mutual funds are actively managed in other words, the fund managers select the funds holdings based on their analyses and expectations for the returns their holdings will generate. In contrast, some real estate mutual funds are designed to track a specific real estate index in this case, the real estate stocks in the fund are selected to closely match what is held in the index. Like all mutual funds, buy/sell orders for real estate mutual funds are completed at the end of the trading day, at the funds Net Asset Value . Real estate mutual funds can be open- or closed-end.
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Common Myths Regarding Hard Money
There are many misconceptions regarding hard money lenders in the real estate industry today, and yet for those in the know, it continuously proves to be a real estate investors biggest asset. Do not be put off by the stigma surrounding the word hard money or by stories youve heard about a friend of a Read more
The Process Of Private Investing
A private lender can invest in a real estate debt fund without having to manage the work that comes with property ownership. Private lenders can also make determinations when it comes to the terms of each loan, and those terms can be customized based on each individual situation and borrower. A private loan typically has a higher interest rate than a comparable loan provided by a traditional lender, but this type of loan may be more accessible to an individual or business that a bank has turned down for a loan.
Private investors will typically review all loan requests that come through and apply their own judgment in making a decision about whether to approve or deny. Their system for analysis may include underwriting, data review, and personal evaluation. A borrower who goes through this process and is approved for a loan can typically get the funds faster than they would when borrowing from a traditional lender. Additionally, the level of transparency provided by a private lender tends to be substantially higher.
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The Best 100% Financing Private Money Lender In Florida
Are you interested in learning more about private investing? Our team of seasoned financial professionals at Titan Funding can provide you with more information and help you make a decision about moving forward in the process. We are backed by passionate banking professionals, aligned to assist individuals and businesses in meeting their capital and investment needs.
Our experience in the financial industry has put us in contact with people across the nation, many of whom are looking for investors who want to put their money into something more stable. Contact us to get started in the process of private investing and take advantage of the benefits.
How Much Do Private Lenders Charge
Private lenders charge different interest amounts ranging from four to 12 percent. The amount they charge will be dependent on several factors, including your investment history, the numbers of the deal at hand, the proposed term length, and more. However, the good news is that oftentimes the interest rates will be negotiable. Remember as you practice your pitch that not only are you trying to secure financing, but also the best loan terms possible.
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Traditional Barriers To Entry For Accessing Real Assets
Buying A New Property
Private money loans can help real estate investors purchase new properties, including residential, commercial, and multifamily real estate. The key to securing these loans is to run the numbers and craft the right pitch. Experienced investors may find it helpful to highlight past deals, while first-time investors should instead focus on the potential profitability. Most investors will agree that it is great to build a relationship with as many potential private lenders as possible, that way, they are ready to meet when a deal comes along. After all, one of the biggest perks of using private money to fund a new deal is the quick timeline. Private money can enable investors to acquire new deals at much faster rates than other lenders.
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What Is Private Money
The first thing I want to talk about is what private money is. There is a lot of confusion about hard money and private money. The biggest problem is that hard-money lenders started calling themselves private-money lenders in order to get more business.
A hard-money lender is a company that lends money to real estate investors. They usually lend from 8 to 15%, and the terms are less than one year. The loans are meant for house flipping but can be used for rental properties that are refinanced quickly as well. Hard-money lenders usually require an appraisal, have loan fees, underwriting, and a loan approval process. Hard-money loans can be a pain. They have a lot of fees, and the lenders can change their minds at any time with no real repercussions.
Private money comes from a person who lends money to another person. When I borrow private money, it is not from a company that specializes in lending moneyit is from someone I know. I have at least 6 people I borrow money from. Some are friends, some are family, some are investors I know, and some are strangers who found me online. Private-money lenders often have no fees, require no underwriting, and most likely do not need an appraisal or valuation.
I love private money because it is so easy to use and I know there will not be any issues once my lender says I can do the loan. I have had many problems with many different hard-money lenders.
Do not confuse hard money with private money!
Multiple State Tax Returns
Unfortunately, this downside often comes as a surprise months or even years after investing. You can try to minimize it by only investing in syndications in your state and the seven tax-free states or making sure the partnership will be filing composite returns on your behalf, but the truth is that if you put any significant amount of money into these investments over any significant amount of time, you are highly likely to be filing tax returns in multiple states for many years to come. There is a cost to this, both in terms of hassle/time, as well as in actual tax preparation expense, whether that means paying $50 per state with Turbotax or paying an accountant. Just figuring out which states you need to file in is quite a chore. I still think filing your own taxes as a direct real estate investor is harder, but not by much. The funny thing about this particular downside is that real estate investments are often sold as being awesome for taxes. They’re clearly talking about taxes paid, not the preparation of the returns. Real estate is most definitely NOT awesome for keeping your tax returns simple.
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Home Equity Line Of Credit
A home equity line of credit, popularly known as a HELOC, is what people can use if they have already purchased a home and have some equity tied up in it. For example, lets say youve lived in your primary residence for 10 years, all the while paying down the mortgage and benefiting from appreciation. The appraised value is now $500,000 and your mortgage payoff is $250,000. You can take out a HELOC to tap into the $250,000 of equity you have in the property . You can then use this $250,000 to purchase on an investment property.
You can also use a service like , which is an alternative to getting a loan. Hometap doesn’t provide loans but invests in the property’s equity. You get the cash to spend as you want, for example, on buying a second home or rental property. Then you settle Hometap’s investment in your home or sell the property before the end of the 10-year term.
Do The Legal Terms Line Up With The Strategy
In addition to developing an understanding of the investment strategy, it is important to understand the contractual obligations of the sponsor with respect to the strategy. In many cases, a sponsor may have a specific business plan that is shared with investors, but a broader set of options when it comes to the legal requirements set by their fund operating agreement. Some flexibility will be warranted, but if youre not careful, you may end up with a set of investments that are very different from what was originally intended. At a minimum, its important to understand what flexibility a sponsor may have, and its usually wise to have in mind some sense of the flexibility you are willing to provide given the quality of the sponsor.
Obviously, this element is simpler when the opportunity is a specific property , but even there, it is important to understand what options are legally available to the fund or sponsor as all investments evolve over time.
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Private Investing Companies Vs Private Investing Individuals
There are two types of private lenders: companies and individuals. Anyone with the funds available can become a private lender as long as both parties agree to the terms of the loan. So, an individual private lender could be a friend, relative, neighbor, business partner, or colleague. There are also companies that specialize in private lending. These are not banks, but private businesses that offer alternative financial products that have key benefits for investors. They will also typically have some underwriting standards, but they wont usually be quite as strict as a bank or other institutional lender.
Other Crowdfunded Real Estate Sites
There are numerous other crowdfunded real estate platforms out there, and more are popping up every single year. We will do our best to maintain this list and update it a few times per year.
Here is a brief summary of a few of the other platforms out there today. Most of these sites have very similar offerings, but you will find some differences when it comes to specific investments and fee structures.
As we do more research on each of these platforms, we will update our list above.
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How Can You Start In Real Estate Crowdfunding
Crowdfunding platforms connect sponsors and real estate investors. To get started in real estate crowdfunding, research the various crowdfunding sites to find an opportunity that interests youâwhether thatâs an individual property or a fund that owns dozens of properties.
Pay close attention to the platformâs vetting process for deals as well as its sponsors. The top platforms employ high levels of due diligence to make sure that sponsorsâand any deals offered by the sponsorsâhave been rigorously evaluated.
Private Lending Models For Real Estate Investors
Private lending as an asset class is in growth mode. In fact, since the 1980s, private lending has been one of the fastest-growing sectors in the lending market as a whole. Since the 2008-09 financial crisis, when banks almost entirely abandoned the real estate lending sector, nonbank lenders have picked up the slack and taken private lending to new heights. Today, some of the fastest segments of real estate lending are in the private money market.
The prospects for future growth in real estate private lending are good and getting better. Certain segments of the market are maturing, which means investors have better opportunities than ever before.
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