Thinking about passively investing in real estate? Not sure how to go about doing it?
Thanks to a special law passed in 2012, private equity real estate investing is now available to a much larger portion of the investing public. That law, known as the J.O.B.S. Act allows private equity real estate firms to offer their very lucrative real estate deals without all the costs of full SEC registrations and all the legal costs that go along with it.
Investing in real estate through private equity real estate firms is a great idea for a couple of important reasons.
- Private equity real estate fund managers tend to be more experienced and therefore generally have a higher chance of success.
- Because of the way private equity real estate funds are structured, they are able to get access to deals that other investors may not get access to.
Private Equity Fund Managers
The normal life cycle of a fund manager starts out like most people start out in this business. They start small and work their way up. Maybe they started with a single family home or maybe even a small apartment complex. Their first couple of deals was. Probably done with their own money or with close family and friends’ money.
After that, they probably ventured into the world of syndication. In a syndication, the Sponsor (the person who finds the deal and takes the lead) usually finds a deal, convinces a seller to sell them the property, and then raises the funds necessary to close the deal. As their experience grows in the business, they may be able to raise money from people outside their original circle of influence. With a syndication, they find the deal, then raise the money.
Finally, after gaining even more experience with syndications, the sponsor may decide to venture into the world of raising a private equity fund as a way of funding their real estate deals. The biggest difference between a private equity fund and a syndication is that with a private equity fund, the money is raised and then the fund manager finds the deals.
As you can see from the timeline I outlined above, raising a private equity fund is usually reserved for more experienced industry professionals. As a result, it follows that the more experienced sponsor would generally have a better chance of success.
Private Equity Fund Structure Gets Access to More Deals
As I indicated above, private equity fund managers raise the money and then go find the deals. Remember, with a syndication, the sponsor finds the deal, then tries to raise the funds necessary to get the deal done.
Sellers always prefer to work with buyers who already have the necessary cash to close the deal. When sellers work with fund managers, they don’t have to deal with the risk that the equity won’t be available. Finally, they know fund managers are generally more experienced and probably more efficient at conducting their due diligence. All these things give fund managers a sizable advantage over syndicators when pursuing deals.
The reality is that sellers care about price, but they also care about what is called “certainty of close” and clearly fund managers have the advantage for all the reasons I describe.
It is for these reasons, we have chosen the private equity fund method of conducting business and why we feel we can be more successful.
