Real Estate Deal Analysis & Advice

Private Real Estate Investing: When Does It Make Sense?

Expertise: Real Estate Deal Analysis & Advice, Real Estate Investing Basics
17 Articles Written
Hand of Business people calculating interest, taxes and profits to invest in real estate and home buying

Private real estate has been steadily gaining traction as a sound alternative investment vehicle geared toward wealth preservation. While there are many advantages to investing in private real estate, some investors may have unrealistic expectations of what the category provides. These expectations and assumptions may lead them to make unwise investment choices.

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As a primer, private real estate funds refer to limited partnership investments. Funds typically own a broad portfolio of properties. In most cases, private real estate is a largely hands-off investment, as a seasoned investor (aka general partner) identifies properties to buy and chooses when to sell.

Here, we tackle what investors can and cannot realistically expect from private real estate investment.

Related: Raising Private Money – Debt or Equity Partners

Realistic Expectations of Private Real Estate Transactions

  1. Higher potential ROI—Profit margins on successful private transactions have outperformed other investment opportunities, such as public REITs, stocks, and bonds.
  2. Tax benefits—These include tax deductions, deferred capital gains tax on investments (such as 1031 exchanges and Opportunity Zone Funds), and deferred liability if investors roll capital gains into a 401(k).
  3. Control—Private investors can play an active role in transactions to varying degrees depending on their preferences, including assessing properties before purchase and choosing who manages the properties, how the properties are financed, and when they are purchased and sold. They also have the ability to compare an investment manager’s strategy with their own risk tolerance and ROI needs.
  4. Transparency—Private investments provide a clearer picture of costs and income related to the property or project than most public transactions do. For example, my company provides our investors access to an online portal where they can track everything they need to know about their investment in one place.
  5. Access to professional investment managers or sponsors—These professionals offer experience; diversity of asset types, and size and structure of financing; the opportunity for meaningful input on investment decisions; and day-to-day management of the property.

Related: 5 Tips to Obtain Private Financing (Or How I Bought My First Post-Bankruptcy Rental)

Unrealistic Expectations of Private Real Estate Transactions

  1. Consistent fees—There are fees involved in both private and public real estate transactions, but fees tend to vary more in private real estate based on the level of management required for each property. The more management intensive, the higher the fees. That said, some investment managers have hands-on management philosophies that incorporate efficiency to minimize investor fees.
  2. Lower risk—Risk is inherent in all investment transactions, and private real estate transactions are not necessarily less risky than other forms of investment—although there are many strategic opportunities for attractive risk-adjusted returns within the sector. As such, they should be evaluated for the same risk factors as any other venture.
  3. Liquidity—Private real estate is well known for its lack of liquidity and the “illiquidity premium” that attracts investors to these deals. While investors can sell their shares in public REITs fairly easily, private investment capital is more difficult to extricate.
  4. Sponsors putting investors first—Expectations that all sponsors of private real estate transactions will act in the investor's best interest are not realistic. Just as the underlying characteristics of the properties and the investment fundamentals must be vetted, so too should the sponsors. Investors should look into the sponsor's history with transactions, skills, and financial incentives before transacting.
  5. Immunity from market cycles—All real estate transactions are subject to market cycles. Understanding how these cycles work and planning for them is part of private real estate investment just as it is for public investment.

While private real estate transactions can require more time and effort than other forms of investment, the potential payoff for investors is often greater. Understanding what these transactions can and can’t provide helps investors make wiser decisions that can aid them in meeting their investment goals.

Do you have any follow-up questions for me about investing in private real estate?

Ask me below.

Since founding Trion Properties, a private equity investment company that specializes primarily in value-add multifamily real estate investments and ground-up developments, Max Sharkansky has led t...
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    Wenda Kennedy JD from Nikiski, Alaska
    Replied 9 months ago
    To me, the real risk is that most people fail at being a real estate investor. They fail to make a profit. They think it should be easy. They don't expect it to be a hands-on business. They don't expect it to be time-consuming and a dirty job. Oh well. For me, it's a great business.
    Glenn Floyd
    Replied 9 months ago
    Great article Max thanks. In your view, what is the minimum level of funding that a private lender would be interested in pursuing?
    Hao Liu Real Estate Investor from Oklahoma City, Oklahoma
    Replied 7 months ago
    Read the whole article and still don't know what "private real estate" is.