Investing in GP Fund vs deal by deal
June 19, 2024
Investing in real estate is one of the primary gateways to accumulating wealth.
There are many ways to invest in real estate for anyone who wants to get started in the industry.
There are also many compelling reasons why investment in real estate can be extremely financially rewarding. On the other hand, for some people, there are a number of compelling reasons why they don’t invest—even though they may want to!
Investing in real estate can be said to be one of the primary gateways to accumulating massive wealth.
Unfortunately, most people will not be able to accumulate comparable wealth from their annual salaries alone. They, therefore, look for ways to invest in real estate to earn supplemental income, such as investing in multi-family or build to rent (“BTR”) syndications, real estate investment trusts or other types of real estate investment vehicles.
Amongst all of those who aspire to be successful real estate investors, the first and, perhaps most important, constraint is Time.
Most busy professionals such as IT consultants, physicians or lawyers are focused on their careers, working long days and spending what spare time they have with their families or friends.
The second constraint is Experience. To be a successful real estate investor, amongst other things, investors need excellent market knowledge, an understanding of the rules, regulations and laws pertaining to the various asset classes and, ideally, some idea about town planning and construction.
After all, buying a property involves large capital, and real estate investing beginners don’t want to or, more to the point, can’t afford to make mistakes.
Yet, having said the above, some people with non-real estate backgrounds do manage to successfully directly invest in real estate… although there are, in fact, much easier ways than taking on the various problems and hassles.
So, which way of investment is best in real estate?
One way of achieving excellent investment returns from real estate investing without all of the hassles involved is by being a “passive investor”.
The alternative is to be an “active investor”.
Being a passive real estate investor involves providing capital to an active investor and reaping the investment returns with little to no effort—it’s quite that simple! Once a passive investor invests capital with an entity sponsoring or promoting the investment opportunity, the next step is to await dividend pay outs and, hopefully, profits once the asset is refinanced or sold.
Passive investors are sources of capital and , do not have to look for investment opportunities on their own and are not responsible for any of the property’s day-to-day operational management or other issues.
There are a variety of ways to start looking for passive real estate investments but a great way to start is to check out a website specialising in such opportunities which can suggest ways for passive investors to find institutional type real estate opportunities.
A more adventurous and time consuming route to successful real estate investing for beginners is to be an active investor. This involves taking a completely hands-on approach to investing. They are heavily involved in every phase of the transaction, and must constantly monitor and manage the different stages of activity, from:
An active investor may acquire and oversee the property themselves, typically with a property management team, although all major decisions rest with the active investor(s).
Another type of investor often referred to in syndicated investment circles is the ‘Accredited Investor.’ This is an individual or a business entity who/which is permitted to make certain types of investments even though such investments may not be registered with financial authorities. An AI, typically, includes high net worth individuals (“HNWI”), banks, insurance companies, brokers and trusts.
As such investments are not registered and do not follow normal disclosure procedures, they are perceived to carry an inherently greater risk.
Therefore, regulatory authorities wish to ensure that AIs are experienced, financially stable, and knowledgeable about relatively risky ventures, thereby requiring lesser need for protection provided by regulatory disclosure filings.
An Accredited Investor is defined under Regulation D of the Securities Act 1933 in the US. This states that an AI must:
Before any investor decides to be a passive or active investor, here are some of the key issues to consider:
A passive investor hedges their risk by investing with an experienced sponsorship team with a successful track record. Also, the risk is spread out across many investors and the General Partner* (“GP”) with a suitably qualified team, will be able to mitigate these risks and deliver on the projected returns.
*Under the direction of the “syndicator” or “sponsor” who sources equity and debt, creates the owning entity and sets up the syndication, the GP is tasked with investing the investors capital into suitable real estate projects, managing the property, meeting targeted returns and exiting the investment in due course..
Actively investing involves greater risk as directly acquiring properties might leave an investor open to market risk, time delay risk or cost overruns, plus risk exposure through defaults on loans or loan guarantees.
For example, an active investor will have to bear the burden of 100% of any losses or unexpected costs associated with, say, a major repair or maintenance issue or overruns on a renovation budget.
Passive investing is hassle-free and all property related tasks and responsibilities are determined by the GP. After making an initial investment, a passive investor can simply review the monthly or quarterly project updates and look forward to their distributions , knowing that their capital is being put to good use by an experienced sponsor.
Of course, providing capital to a third party and giving up effective control of the investment, means there is heavy reliance and trust on the sponsor and their team to execute the business plan and perform as planned. .
On the other hand, the active investor has to decide which investment strategy to pursue, the type of asset to acquire, the type and extent of renovations to undertake, the quality of tenant to sign-up and the rental rates.
Finding attractive investment deals is very competitive and they may be properties out of town or out of state. It’s necessary to be constantly searching for deals, bearing in mind the key criteria which can make a deal successful. The ratio of all deals reviewed and assessed to finding the winning opportunity is comparably low.
Obviously, in passive investing, all these issues are taken care of by the sponsor as passive investors effectively outsource the acquisition process to syndicators who search for and identify quality deals.
Being a passive investor in real estate investment has other benefits
Apart from sitting back and letting other professional real estate investors take an active role in acquiring or overseeing property assets on a day-to-day basis, being a passive investor has other key benefits:
Passive investors can choose different asset classes across different geographical locations, thereby enhancing the opportunities for above average returns, but also mitigating risk. Many of the larger 100+ multi-family or BTR unit real estate investment projects which provide higher returns and economies of scale and positive cash flow from commencement of operations were previously out of reach of smaller investors.
This type of such project are usually only accessible to institutional investors, stock-exchange listed companies or the very rich;
Multi-family or BTR real estate private equity syndications are when multiple investors pool funds to acquire larger scale real estate assets. Investors secure an ownership interest in the property pro rata to the amount invested. Such amounts, as well as the amount contributed by the GP forms the equity, and there will be a loan arranged by the sponsor or GP.
The GP will undertake all other duties and responsibilities, making multi-family or BTR real estate syndications superior to other types of passive investment for a wide variety of reasons.
Other types of syndications may be for office space or RV parks or storage space type assets.
Real Estate Investment Trusts (“REIT’s”) are corporations which own commercial real estate. When an investor invests in a REIT, they are purchasing a share in a company which owns a real estate asset(s) and does not actually own the real estate itself.
A REIT’s shares are listed on a local or international stock exchange and can be traded in the same way as stocks and shares.
It is similar to that of a mutual fund in that investors combine their capital to buy shares in residential or commercial real estate (such as serviced apartments, shopping centres, hotels, logistic centres, warehouses etc) and then earn income from net rentals accruing to the properties as a result of their share ownership.
There may be limitations on how a REIT may invest available funds and/or a need to keep a % of such funds in cash.
In general, a REIT will specialise in a specific real estate sector such as serviced apartments or logistics centres. However, there are other more diversified and specialty REITs which can hold different types of properties in their portfolios, perhaps a combination of hospitality-type, office and retail properties.
REIT owned properties do not need to be in one legal jurisdiction and the REIT may own properties in several different countries.
REITs generally offer more conservative returns than multi-family or BTR syndications, with more rules and regulations governing their operation and more expense to be taken into account.
A real estate fund is a type of mutual fund that raises capital from multiple investors and then uses it to purchase multiple properties.
A major difference between real estate funds and syndications is that funds do not generally identify which assets they are acquiring to investors. . In syndications, however, the asset or opportunity has already been identified, and investors are well aware and knowledgeable about this particular property. .
Other real estate funds primarily focus on investing in securities offered by public real estate companies, such as the shares of REITS.
Broadly, there are three main types of real estate funds:
These funds offer returns through the capital appreciation of a property assets and do not usually provide short-term dividend income to investors as a REIT may do. However, real estate funds, which can be open- or closed-end and either actively or passively managed offer a wider selection of property assets than individual REITs.
Investing in real estate funds does, generally, offer liquidity and diversification of the types of real estate. However, investment returns may be lower than syndicated investment opportunities as many funds charge entry and exit fees, as well as annual management fees, which all are deducted from gross returns.
Again, the selection of property assets to invest in is not within the control of the passive investor.
Crowdfunding allows a group of investors to pool their money together to purchase real estate assets. Such a transaction often uses social media platforms to connect investors to property investments so that they can invest online.
There are three main types of crowdfunding: equity-based, donation-based and debt-based and its main attractions are portfolio diversification, easy accessibility and investors only need relatively small amounts to get started.
Real estate crowdfunding schemes are similar to equity investing as an investor can buy a portion of the property and become a shareholder. However, crowdfunding investments tend to offer lower returns.,
On balance, passively investing in real estate syndications offers the preferred way for many busy professionals.
Investment into syndicated multi-family or BTR properties can yield the following advantages:
June 19, 2024
May 27, 2024
