What is Private Equity Real Estate?

Private equity real estate is an investment opportunity in which multiple investors pool funds and invest in ownership of various real estate properties. This type of investment is achieved when individuals make a significant initial commitment of capital to a managed fund that scouts out the potential real estate investments. Strategies used by these funds vary in terms of risk involved and the types of property considered viable for investment. One main drawback to private equity real estate for investors is that their funds are generally frozen in the investments for multiple years, providing little flexibility.

Real estate investment is a highly sought-after target for many investors, but taking on such an investment individually can be a daunting prospect. Investors who have the capital to get involved in this volatile but potentially profitable environment may not know how to begin. For that reason, private equity real estate may be the right option, simply for the expertise and diversity that is built into this type of investment.

An individual desiring to become involved with private equity real estate must first find an investment fund that specializes in this process. Such funds are not for casual investors, as they generally require a significant initial investment from individuals wishing to participate. The capital of all participating investors is then pooled together, and fund managers select the types of real estate to be included. Fund managers usually construct their investment portfolios to achieve diversity, which means that investments of various types are chosen to encapsulate multiple strategies and to minimize risk.

There are generally three types of overall investment strategies involved with private equity real estate. Core-plus is the safest of these, with the value-added strategy incurring a slightly higher degree of risk and the opportunistic approach being the riskiest strategy of all. For example, a core-plus strategy might include only real estate with proven value in well-traveled areas. On the other hand, an opportunistic strategy might include the purchase of properties on undeveloped land in relatively remote locations.

It is important to note that private equity real estate might not appeal to all investors. To participate in private equity, an investor must accept the low liquidity of the investment, which means that the funds may be tied up for several years. In addition, the real estate market itself is highly volatile, meaning that there is no guarantee that the significant capital required to enter into a fund will be returned. Investors should research any fund with which they might wish to invest, and they should also study the real estate market as a whole before proceeding.