Difference Between A Private Equity Fund And REITs
Preston Byrd is a Real Estate Developer, Wealth Creator, Public Speaker and Managing Partner at Horizon Companies.
For current and aspiring real estate developers who are looking to invest in commercial real estate (CRE), there are many different types of investment vehicles out there to be aware of—each with its own set of risks and rewards. In this article, I’d like to focus on two popular types of investments in the real estate sector: private equity funds and real estate investment trusts (REITs). Both have their own benefits and drawbacks, so it’s important to understand the difference between the two before making any decisions.
Private Equity Funds
Right out the gate, I want to address private equity funds. A private equity fund is a type of collective investing strategy used to buy a variety of equity assets. These funds are typically limited partnerships with a fixed term of 5 to ten years. One of the benefits of investing in private equity is the potential for higher returns. However, private equity funds typically also have a higher level of risk for investors since these investments are not publicly traded on an exchange.
According to NASDAQ, there are a number of reasons why you might consider investing in real estate through private equity, even during these uncertain times. First and foremost, private equity real estate firms typically invest in developments that are well-positioned to weather an economic downturn, offering potential protections to an investor during a recession or a market downturn. Furthermore, private equity real estate firms usually focus on long-term investments. This means that even if there is a dip in the market or in the performance of your portfolio, you can rest easy knowing that your investments are not likely going anywhere anytime soon because they are fixed assets.
And last but not least, private equity real estate firms often have years of experience turning around distressed investment properties. This means that if any of your portfolio investments do run into trouble, there’s a good chance that the firm will be able to turn things around and get the investment back on track. Of course, it’s important for each person to assess their own particular risk tolerance to determine what works best for them.
Real Estate Investment Trusts
REITs, on the other hand, are companies that own and manage real estate that generates income. This can include office buildings, apartments, warehouses, hospitals, shopping centers, hotels and commercial forests. Some REITs might also finance real estate. One of the major benefits of investing in REITs is that they offer liquidity, which means that you can typically cash out of your investment if you need to. REITs are also less risky than private equity funds since they are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
In my experience, what makes investing in REITs so favorable to many is they tend to produce a consistent and predictable income over time. Once the real estate asset has been built or acquired, the REIT’s job is to rent it and stabilize it. Once they are stabilized, the income is typically the same year over year adding in the annual rent escalators.
So, which type of investment is right for you? That depends on your individual goals and risk tolerance. If you’re looking for high-potential returns, then private equity funds might be a good option for you. However, if you’re looking for a more stable investment with less risk, then REITs might be a better choice. Either option offers a financial upside and they both include you getting involved in owning real estate. Ultimately, it’s important to do your own research and consult with a financial advisor before making any decisions.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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