Investing in Real Estate Private Equity: An Insider’s Guide to Real Estate Partnerships, Funds, Joint Ventures and Crowdfunding by Sean Cook

Investing in Real Estate Private Equity: An Insider’s Guide to Real Estate Partnerships, Funds, Joint Ventures and Crowdfunding by Sean Cook

Chapter 1: Investment Structures
"Shares are not mere pieces of paper. They represent part ownership of
a business. So, when contemplating an investment, think like a prospective
owner." – Warren Buffet
Since you’re still reading, let’s operate from the not unreasonable
assumption that you are interested in investing in real estate.  You recognize
the value of an allocation to real estate in your otherwise well diversified
portfolio and are now deciding how to invest your allocation.  Of course,
you can simply go out and buy property directly, but I suggest that this
might not be the most efficient strategy for most investors. Pooling your
investment with others allows you to spread your real estate allocation
across more properties (lowering concentration risk) and take advantage of
the expertise of professional investors. Real estate needs to be owned and
managed by someone though, so a number of legal structures have emerged
to allow investors to work together to buy real estate, while still allowing
for efficient decisions to be made on behalf of many underlying owners. 
In this chapter, we discuss common structures for pooled real estate
investments as well as some of the benefits and drawbacks of each. When
you hand over your hard earned money, you should know exactly what you
are getting in return. It is ultimately up to you to determine which of these
structures (or combination thereof) makes the most sense given your
individual situation.
As with any investment, there are a variety of factors that should be
considered.  Before picking a product type, here is a short set of questions
to ask yourself:
· How much money, in total, do you want to allocate to real estate?
Within this allocation, how much diversification do you want? 
· Are you comfortable trusting someone else to make investments or
do you want to pick individual properties?  Would you prefer to have
an active strategy of picking properties or to have a passively managed
and broadly diversified portfolio?
· How much risk are you comfortable with?  Can you withstand the
total loss of an investment?  An allocation?
· Do you already have exposure to real estate through another asset
(mutual funds, equity in your home, a rental property, etc.) or is your
income or career tied in some way to the real estate industry? 
· What is your need for liquidity? How long can you tolerate your
money being tied up in a property and unavailable for other
investments or needs?
There are no right or wrong answers to these questions.  Keep in mind
the Greek aphorism to “know thyself”, and consider these factors as we
describe the pros and cons of each structure below.
Public REITs
This is a book about private real estate, but publicly traded REITs need
to at least be discussed briefly as a common and efficient way to allocate
money to real estate.  Before we discuss alternatives, let’s pause briefly to
talk about the REIT class and how it could fit in to your strategy.  The REIT
structure was created by the U.S. Congress in 1960 in an effort to enable a
real estate version of the mutual fund. REITs are companies that own a
portfolio of real estate (equity REITs) or mortgages (mortgage REITs). At
least 90% of the income from this portfolio is then distributed directly to
shareholders, who then pay taxes on that income.  Many REITs are publicly
traded on major stock exchanges, which means real estate ownership could
be just a few clicks away via your online brokerage account.  Liquidating
your real estate investment is just as easy. This liquidity is perhaps the most
important attribute that differentiates REITs from private real estate
investments. 
In general, equity REITs tend to hold higher quality properties, in better
locations, for longer periods of time, than most private real estate funds or
operators.  REITs tend to be large (average market cap is $4 billion
(NAREIT n.d.)) because there are significant one-time and ongoing
regulatory costs associated with operating a publicly traded company and
raising debt and equity from public markets, and these costs need to be
spread over a large portfolio to be efficient.  Because of their scale, REITs
need to focus on larger transactions to keep their organizations efficient,
and often use lower leverage when purchasing property.  The combination
of large portfolios and lower leverage means that a complete meltdown of

Investing in Real Estate Private Equity: An Insider’s Guide to Real Estate Partnerships, Funds, Joint Ventures and Crowdfunding by Sean Cook