Real estate has long been regarded as one of the most reliable investments for building wealth over time. And within the real estate sector, private equity real estate deals have the potential to deliver even higher returns than traditional rental properties.
But up until recently, private equity real estate investing seemed out of reach for ordinary investors without massive resources.
That’s quickly changing as new platforms and clubs are making private equity real estate investing accessible to regular investors. With full tax benefits, double-digit projected returns, and low buy-in minimums, 2024 could be the year you start tapping into the power of private equity real estate.
What Exactly Is Private Equity Real Estate Investing?
Private equity real estate investing involves pooling money with other investors to directly invest in large commercial or residential real estate properties. This differs from investing in publicly traded REITs or buying rental properties on your own.
As Brian Davis, real estate investor and founder of the real estate investing club SparkRental, explains:
“Private equity real estate investing means partnering with experienced sponsors to invest in apartment buildings, self storage units, medical offices, retail centers, and other properties. You become a passive limited partner while the sponsors actively manage the deal.”
So instead of being a landlord responsible for maintenance and management, you simply invest money and collect returns. The private equity sponsors handle all the day-to-day work.
Why Consider Private Equity Real Estate Investing in 2024?
Experts like Davis say now is the time for investors to start moving into private equity real estate deals. Here are some of the biggest reasons to consider adding it to your portfolio:
1. Higher Returns Than Traditional Rental Properties
While typical rental properties may produce 5-10% returns yearly, private equity real estate projects are designed to deliver 15-30% total returns. The increased scale and efficiencies of larger commercial properties allow for this boost.
Davis notes that 4-10% of these total returns are targeted as cash flow you receive each year. That passive income can compound quickly.
2. Full Tax Advantages
From depreciation to interest expense deductions, private equity real estate investments qualify for the tax perks associated with direct ownership. This helps maximize after-tax returns.
3. Inflation Hedge
With inflation expected to remain high in 2024, real estate’s tangible assets offer an inflation-resistant way to grow wealth. Rents and property values often rise with inflation over time.
4. Low Buy-In Minimums
Whereas private equity real estate investing used to require hundreds of thousands per person, new opportunities from platforms like SparkRental allow buy-ins of $5,000-$10,000. This opens the door for regular investors.
5. Diversification
Adding private equity real estate to a stock and bond portfolio provides broader diversification of asset classes for reduced risk. It also diversifies within real estate itself by going beyond just owning one rental home.
How Does Private Equity Real Estate Investing Work?
Gary Beasley, co-founder and chairman of Roofstock, gave a simple overview of the private equity real estate model:
“You’re investing passive capital that then gets leveraged up and used to buy real estate assets. An operator is responsible for creating value with those assets through renovations, lease-ups, management improvements, or other means. After a business plan is executed over several years, the asset is sold and profits are distributed to investors.”
Investors like you simply provide the initial capital while the sponsor handles the rest. These are the key steps:
- Investment Capital Raised: Accredited investors provide funding for an identified property or portfolio of properties. Historically this required $100k+, but new platforms allow investments starting at $5k.
- Asset Purchase: The sponsor pools this capital and leverages it 4-5x by taking out financing to buy larger assets than investors could access individually.
- Asset Management: The sponsor improves operations, tenancy, cash flow, etc. to increase property value over 2-5 year hold periods.
- Asset Sale: The portfolio is sold to realize big gains and return capital to investors. Proceeds are distributed after debts paid.
While each private equity real estate deal is unique, this framework allows ordinary investors to tap into value-add commercial properties in a hands-off manner.
What Are the Risks With Private Equity Real Estate?
Private equity real estate investing doesn’t come without risks. Before jumping in, understand that:
- Illiquidity: Money is tied up for years given the multi-year hold periods. Investors can’t easily cash out early.
- Accredited Investors Only: Current SEC regulations limit private equity deals to accredited investors with $1M+ net worth or $200k+ income.
- Fee Drag: Multiple layers of fees charged by platforms, sponsors, brokers, etc. can reduce net returns. Pay attention to the fee breakdown.
- No Guarantees: Despite sponsors’ projections, there’s no guarantee a property will increase in value. Leverage magnifies risk if deals go south.
- Specialization: Most sponsors focus on a specific property type (e.g. multifamily) in select markets. Diversification is limited.
However, choosing an experienced sponsor with a solid track record can help minimize risks.
Private Equity Real Estate Investing Platforms to Watch in 2024
While private equity real estate funds used to require checking a half dozen boxes just to qualify, new investing platforms now open the door for investors who don’t meet those traditional requirements.
Here are some of the top platforms making private equity real estate investing more accessible:
1. SparkRental
Founded by real estate investor Brian Davis, SparkRental offers one of the lowest minimums at just $5,000 per deal via their investor pools. The pools allow members to diversify across multiple properties and sponsors for reduced risk. SparkRental vets each deal and sponsor for quality and alignment of incentives.
2. CrowdStreet
CrowdStreet offers individual deals with minimums starting at $25k. While higher than SparkRental’s pools, it provides exposure to major markets like Los Angeles, New York, and Miami that would be difficult to access otherwise. CrowdStreet offers vetted deals across property types including multifamily, retail, and self storage.
3. RealCrowd
RealCrowd focuses specifically on high-quality multifamily properties, with a minimum of $25k per deal. A particularly unique advantage is RealCrowd’s investor protection guarantee, which ensures at least 80% of the principal invested is returned before sponsors receive any performance fees. This reduces risk.
4. CrowdInvest
CrowdInvest stands out by offering deals across three platforms: CrowdInvest Select for vetted deals with a $25k minimum, CrowdInvest Marketplace for deals with a $10k minimum, and Fundrise eFunds for diversified funds with a $500 minimum. This range helps accommodate various investment sizes.
Final Takeaways on Private Equity Real Estate Investing
While private equity real estate investing has seen restricted access in the past, new platforms are breaking down the barriers to turn these higher returning deals into viable options for individual investors in 2024.
Davis’ advice for interested investors is simple:
“Focus on quality over quantity. It’s better to invest $50k in one professional operator’s deal than $5k with ten amateur sponsors. Find trusted platforms that vet the deals and operators for you.”
By picking the right deals, private equity real estate investing can pay off with double-digit targeted returns and passive cash flow. Just be sure to evaluate the risks and do your due diligence before choosing a platform or sponsor.