Real Estate Private Equity Fund vs Real Estate Debt Fund

10 Replies

I am currently looking into real estate syndication, joint ventures, private equity funds, and debt funds. Do you run one or are you invested in one? If so, what was 1 major pro and 1 major con of your investment choice?

real estate syndication

Pro: Sit back and earn a return or share of profits and just invest your money. Con: You have no control and need to trust that Syndicator and make sure their numbers are accurate.

Joint Ventures

Pro: A larger portion of the work and profits. Con: Which some might not see as con but now taking on more liabilities and possibily signing on a loan or giving a bad boy/bad girl guaranty. 

Debt Funds

Pro: More stable deal as long as they did go high LTC Con: Have to be patient and long term player and happy with low returns

Private:

Pro: Can be stellar returns Con: Need to have a strong heart as there will be a bumpy ride and losses. 

Roni put it well. I'm in the syndication world, both actively syndicating and investing passively in syndications. 

Syndication pro is that we can passively partner with very experienced investors. 

Con is the counterparty risk. However, that's present in basically every passive real estate investment strategy. Learn to do due diligence and mitigate your risk!

@Roni Elias , oh, wow you covered all 4; thank you! I had to Google LTC (loan-to-cost ratio, if I Googled the right thing). I did not realize debt funds were slow and had lower returns in contrast to the others. I will have to see if/where this has a place in my investment approach. I will have to read more about debt funds. As for private equity, I am guessing investors hand over their money before the properties are identified for the fund (maybe they know what type of properties, but not the exact properties), so it is blind experience (somewhat).

Hello yes those private equity funds are usually blind pools. They will say we will focus on these type of properties, size, and so forth



Originally posted by @Account Closed , oh, wow you covered all 4; thank you! I had to Google LTC (loan-to-cost ratio, if I Googled the right thing). I did not realize debt funds were slow and had lower returns in contrast to the others. I will have to see if/where this has a place in my investment approach. I will have to read more about debt funds. As for private equity, I am guessing investors hand over their money before the properties are identified for the fund (maybe they know what type of properties, but not the exact properties), so it is blind experience (somewhat).

 

@Taylor L. , I am not too far from Richmond. I had to Google "counterparty risk" as well. According to Investopedia, "Counterparty risk is the likelihood or probability that one of those involved in a transaction might default on its contractual obligation. Counterparty risk can exist in credit, investment, and trading transactions." Does this mean I need to research the other team members in the syndication? Like the other GPs, the lawyers, etc.?

Originally posted by @Account Closed , I am not too far from Richmond. I had to Google "counterparty risk" as well. According to Investopedia, "Counterparty risk is the likelihood or probability that one of those involved in a transaction might default on its contractual obligation. Counterparty risk can exist in credit, investment, and trading transactions." Does this mean I need to research the other team members in the syndication? Like the other GPs, the lawyers, etc.?

 Nailed it! 

@Velvet Basemera-Fitzpatrick

All options above Pro: An opportunity to passively invest with expert operators. Cons: Often have minimum wealth requirements and can require anywhere from 50k to 1 million to get your foot in the door.

I have invested in and owned all of these structuring types. There are pros and cons to each and one could argue all sorts of things given how the OP was worded. A JV could be a great investment with a solid sponsor to accompany it as could any of the other structuring types. The key is evaluating the risk-adjusted return given the skill of the sponsor, which is no easy task. Private offerings offer greater upside than exchanged-traded securities for a reason and the "tax" you pay is that they're harder to evaluate, less passive, and consume more of your valuable time.

I don't think there is a clear-cut way to compare things the way you've framed things in this post.  Look for great value when you invest and try to be greedy when you identify it.  Otherwise you're probably better off just investing your money passively in index funds and dollar cost averaging.  

Originally posted by @Daniel McNulty :

@Velvet Basemera-Fitzpatrick

All options above Pro: An opportunity to passively invest with expert operators. Cons: Often have minimum wealth requirements and can require anywhere from 50k to 1 million to get your foot in the door.

Thank you!

 

Originally posted by @Bryan Hancock :

I have invested in and owned all of these structuring types. There are pros and cons to each and one could argue all sorts of things given how the OP was worded. A JV could be a great investment with a solid sponsor to accompany it as could any of the other structuring types. The key is evaluating the risk-adjusted return given the skill of the sponsor, which is no easy task. Private offerings offer greater upside than exchanged-traded securities for a reason and the "tax" you pay is that they're harder to evaluate, less passive, and consume more of your valuable time.

I don't think there is a clear-cut way to compare things the way you've framed things in this post.  Look for great value when you invest and try to be greedy when you identify it.  Otherwise you're probably better off just investing your money passively in index funds and dollar cost averaging. 

This was helpful as well. Thank you! I am looking into these options as my long-time colleagues and I are researching investing vehicles/structures that will allow us to scale easily to achieve our individual goals, together. Based on these responses and my reading as of today, a first JV, with professionals that have expertise in this approach, may be our entry point to figure things out. We can now focus on getting specific on what types of commercial multifamily or residential properties (size, class, location), individual and collective investment goals, the timeline, and then begin reaching out to realtors, lawyers, cpa's etc. Comments and critiques welcome!

 

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