Real estate has been gaining ground as a comparatively safe alternative investment category that serves as a hedge against inflation with the potential for extremely attractive risk-adjusted returns.
As investors look to diversify their portfolios, interest in real estate is growing. Thus, investors and advisors alike are expanding their knowledge and digging deeper into real estate options.
One method of investing in real estate is through public real estate investment trusts (REITs), real estate-owning companies that trade shares on the stock market. That said, there is another category on which many investors are seeking advice: private real estate.
What Is Private Real Estate?
Private real estate refers to investments that are not open to the general public in the form of publicly traded stocks or shares. It can involve outright purchases of real property, pooled investment in that property or investment in funds that buy property.
Private real estate investments can refer to both equity (direct ownership) and debt (mortgages) in real estate properties. Private equity funds allow investors to participate in real estate investing without the responsibilities of sole ownership, while private debt funds help finance the purchase of real estate by other entities.
Investors placed $39 billion in private equity funds during the first quarter of 2019—$8 billion more than in the previous quarter—as prices and competition for these assets continues to rise, indicating an increased level of confidence and trust in the sector.
Distinguishing Private Real Estate Investment from Other Types
Private investors generally have a higher level of property ownership than public or institutional investors do, which brings with it the potential for greater return on investment. With that higher level of ownership comes more control over the investment property, how it is managed and improved and how it is marketed.
The illiquid nature of these transactions can limit cash flow, but essentially investors view potentially receiving higher returns on private real estate transactions as an “illiquidity premium.”
Qualifying for Certain Investments
It is important to note that certain forms of private real estate investment (including those not registered with the Securities and Exchange Commission that do not qualify for a Regulation A exemption) are only open to accredited investors.
An accredited investor has a net worth of at least $1 million (excluding their residence) or an annual salary of $200,000 (or $300,000 if filing jointly) for the prior two years.
The SEC has been exploring the idea of expanding the definition of an accredited investor to allow more people to qualify for private investments. Many investment professionals applaud this idea, as long as there are additional qualifying standards such as a demonstrated level of education about the risks.
Private real estate offers investors the opportunity for wealth preservation and portfolio growth in a way that other types of investment do not. Along with the capital advantages, investors gain knowledge and insight into the world of commercial real estate and how it reflects the broader economy.
Have you invested in private real estate before, and what was the result?
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