You’ve heard of real estate syndications but what about real estate private equity (PE)? What’s the difference?
The simplest explanation is that a real estate syndication invests in properties while real estate PE firms invest in other private companies – ones that invest in real estate.
Both investment vehicles may be similarly structured – typically as limited partnerships (LPs) or limited liability companies (LLCs) with investors owning non-voting LP or LLC interests and the promoters owning controlling general partnership or LLC interests – but their investment strategies are significantly different.
While syndications are property-focused, real estate PE firms take a more broad-based approach when evaluating which private companies to invest in.
The difference between evaluating syndication opportunities and real estate PE opportunities is that while with syndications you’re looking at specific financial projections, demographic and market data specific to particular properties, with PE firms, you’re evaluating their overall strategy.
What asset class, property types, investment strategies do they focus on when investing in other companies?
The key to remember about real estate PE firms is that one size does not fit all. The key is to align your investment objectives with those of the PE firm’s and evaluating management experience, expertise and operational prowess comes more into play than ever without the financial data and projections for specific properties to rely on like with syndications.
If you’re a conservative investor seeking immediate, consistent returns from plug-and-play properties that need little renovations or operational adjustments, PE firms invested in companies that target Class A, Core CRE opportunities that are less-correlated to the broader markets will likely be good fits.
If you’re more aggressive in your risk taking for the potential higher rewards, you might consider PE firms that target Class B-C, value-add and opportunistic assets.
Summary of Property Types and Investment Strategies.
Towards the end of helping you find, evaluate and select the right real estate PE opportunities, here is a primer on the different property types and investment strategies so that you can align your goals with those of a particular PE firm.
PROPERTY CLASSES A – D:
According to this classification system, properties are graded according to a combination of geographical and physical characteristics.
These letter grades are assigned to properties after considering a combination of factors such as age of the property, location of the property, tenant income levels, growth prospects, appreciation, amenities, and rental income.
CLASS A – Class A properties tend to be new construction or built within the last 5 to 10 years with top-of-the-line amenities and professional management. They’re located in the most desirable areas with high potential for appreciation with high quality tenant profiles and with little to no deferred maintenance issues.
The prime locations and condition of these properties command high rents and experience low vacancies. Because of their premium condition and locations, Class A properties also come with premium prices.
CLASS B – These properties are generally 15-20 years old, with lower-profile tenants, and may or may not be professionally managed. Rental income is lower than Class A and there may be some deferred maintenance issues. These buildings are typically well-maintained.
CLASS C – Class C properties are typically more than 20 years old and located in less than desirable locations. These properties are generally in need of significant renovations for repositioning in the market to achieve steady cash flows.
CLASS D – Class D properties are old, run-down, and typically, without exception, in need of significant repairs. They are located in distressed communities with high crime and poor schools. Tenants have low income and bad credit with many even having criminal backgrounds. These properties are relatively cheap to acquire but also experience high vacancies and low appreciation.
Assets under this classification system are differentiated by their levels of risk vs. reward with Core real estate investments on the low end and opportunistic real estate investments on the high end of the risk-reward spectrum.
Investing in real estate PE opportunities can be highly rewarding but the PE firm you’re considering must have investment objectives that align with yours and that the firm’s management possesses the skills, knowledge, experience and infrastructure required to carry out its strategy and achieve its goals.
The management screening process with PE’s and the asking of the managers the right questions is more vital than ever as you’re less property-focused like with syndications and more strategy-focused.
Real estate PE opportunities can be highly lucrative as elite investors have proven, but they can also be high risk in the wrong hands.
Doing your homework on a firm’s management and strategies will go a long way in identifying the most promising opportunities.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.