Private Equity Real Estate Structure (Part 6 of 8)

LP & GP Structure

Real estate funds, like the ones managed by Infinity, are often a great way for people to invest with experts in the field. Doing so gives you access to real estate markets without researching or managing property. These funds have many benefits: Well-managed funds have the resources and knowledge to do the necessary research on properties, can invest anywhere in the country (or the world), can explain what you are investing in, and usually have reasonable fees.

However, not all investment funds are the same, and they have a key difference.

Limited Partner Funds (LPs)

Limited partner funds are passive investments. They are often institutional in nature, like academic endowments or pension funds. They can also be wealthy individuals or families with a lot of money looking to grow it via an investment in real estate.

As you can likely tell by the word "limited," LPs have less at stake here and are less involved in an asset's day-to-day management than a general partner (GP). LPs will invest money under the guidance of a financial adviser or GP, then back away and (hopefully) watch their investment grow. They do not have anything to do with the fund's day-to-day management. They are not involved in how the asset is constructed, rented, or managed. If they are a wealthy family, they may rely solely on financial managers and not even be sure where their investment is. They don't need to be real estate experts and have nothing at risk besides their investment.

The LP structure works for individuals who want to be involved in real estate but don't want to get involved in the detailed work of such an investment.?

General Partner Funds (GPs)

As you would imagine, GP funds are the opposite of LP funds. They actively manage investments and are directly responsible for how they are managed. Indeed, GP funds typically work with LP funds by soliciting their investments.

GP funds do all of the work that LP funds don't. For example, they will probably work with LP funds to find sources of money that can be used to buy or fix up the property. From there, they will find a property, purchase, market, manage, and more. As such, being in a GP fund means taking an active role in the performance of an investment.?

Doing so is a much more labor-intensive proposition. Since GP funds handle real estate deals, they have complete control over the funding. Usually, though, this control is limited by the terms agreed upon with an LP fund. As such, the managers of a GP fund will have more expertise than those of an LP fund.?

Usually, there is a GP/LP agreement. An LP will agree to provide funding and set the general parameters for an investment. In exchange, the GP fund will get money and work to make a deal happen for everyone. As a result, GP funds have advantages: They have more control over an asset and can also require management fees in exchange for the extensive work they put into a property.

They also take on a lot more risk because they are responsible for senior loans, mezzanine loans, construction guarantees, stabilization guarantees, and many other legally binding obligations.?

What Are the Portfolio-Level Implications?

Property investment is never made in a vacuum; you must consider your other assets. Portfolio-specific concerns involve many things:?

• How much money do you have?
• What are your short, medium, and long-term investment goals? Is this an investment you want to live off of, or are you looking to generate cash? Is it an investment you’re making for retirement??
• What sort of diversification are you looking to have? What kind of diversification are you looking to achieve?
• If you are investing for business purposes, how will the purchase of an asset impact your portfolio? Will it take away from money that could be better spent elsewhere? Will you need to draw on credit or leverage other properties? Will you use other people's money to make the investment or your own?
• Are you working within a broader partnership? How could this investment impact that partnership?

On the other hand, there are some things to think about that should be seen as a best-case scenario. For example, let's say everything goes smoothly and your investment successfully generates cash. How will you spend that money? How will you invest it elsewhere? Will you support it back into this property, pocket the extra money, or use it to make other investment gains?

As you can see, there are extensive additional implications you must keep in mind when investing.?

What Are Asset-Level Characteristics??

When considering asset-level characteristics, you must determine what part of an asset will work for you—and what won't.?

For example, in some cases, a potential investor may be interested in active asset management. Active asset management means you are a landlord and have a presence on your property. For example, you collect the rent; manage the renovations; screen the tenants, etc. If so, you can save money on hiring a property manager or onsite staff to protect the asset.?

However, the odds are that you can only do this if your multifamily property only has a few units. Any larger and you may find yourself either out of time or out of your depth. You may need to hire staff or a property management firm in this case. Either way, it costs money, and you must adjust your finances accordingly. If you can't do that, you should reconsider how you make your investments.

Next, consider the location. Is the location near you? Do you know who the key players are within the market, or are you working with someone who can at least give you this information?

Finally, consider the income and rent level of a property. Is it something you can easily manage, and is it a sector of the multifamily ecosystem actively seeking tenants? If not, you may want to reconsider where you invest your money.

How Do You Invest?

Choosing how to invest in real estate can majorly impact the properties you can find and the ultimate return on your investment. There are many ways of investing in real estate. For example:

Direct Investing

Just as it sounds, you do the work yourself or with a partner:

• Invest your money into buying a house or building.
• Make any necessary renovations.
• Rent it on the open market.

You take all the potential profit here—but you also take all the risks. If something goes wrong or you get a bad tenant, you may be on the hook for a massive loss. Purchasing and renting a property is often done as part of a partnership or with someone with experience in this area. You can try to do this independently, but many first-time real estate investors find buying and renting a house more difficult than anticipated.

Alternatively, many people will buy a home and rent it but use a property management firm to handle all maintenance on the property. However, doing so will turn your rental property into a passive investment. Yes, this allows you to back away from the management of the property and ensures that another firm is responsible for dealing with it. Still, it comes at a heavy price, as you will often lose a good amount of the gross profit on your rental, thus hurting your bottom line. In addition, this may mean that you have to raise the price of your rent, and doing so may not be possible in an uncompetitive market.

There are additional problems with property management firms. First, you may not know if things go badly until it is too late and there is damage to your property or reputation. Depending on your contract with your property management firm, this can leave you holding the bag on an expensive piece of property and unable to do anything with it.?

Real Estate Investment Group?

With the methods below, a real estate investment group like Infinity9 can often find a good balance.?

A real estate investment group is just what it sounds like. First, you invest in the group, which then supports in several properties. Different real estate investment groups are structured differently. Some invest in residential and multifamily homes, others invest in different parts of the real estate market, and some only invest in certain places. Infinity lets you invest property by property for curated opportunities vetted and selected by a team of experts.??

You give your money over to the investment group, who will then give you a return on your investment based on already agreed-to terms. Investing with a real estate investment group allows you to earn a piece of the action in real estate without having to manage the day-to-day operations of the real estate market. In other words, you turn your money over to the experts.

Using a real estate investment group is the best of both worlds. You can select the properties you are interested in, but you don't have all of the stress and trouble that comes with investing on your own. As a result, it often fits the needs of most investors’ portfolios.??

Real Estate Investment Trust

A real estate investment trust (REIT) has some similarities to a real estate investment group. The critical difference is that a REIT is a stock instrument that can be purchased and sold on the public market. There are several REITs available. They are structured very similarly to stocks, with some exceptions, as they are known for their ability to provide investors with a steady cash flow in the form of dividends. In addition, since shares are public, anyone can purchase or sell them.

The fact that REITs provide such high dividends is often seen as a major advantage. Indeed, REIT dividends tended to be twice as high as the average dividend on the stock market. This high level of dividends means that REITs have the potential to provide extensive cash flows to an individual. Furthermore, most dividends are taxed at a lower rate than ordinary income. As a result, there may be tax advantages to receiving dividend income from a REIT.

The problem? You cannot get the same level of cash flow via an investment in a REIT that you can with other forms of investment, like investing directly into a property or an REIG. As a result, you may be missing out on financial opportunities. Furthermore, REITs are often subjected to the same economic forces as other stocks. Sometimes, this can be good. Other times, it can be catastrophic. REITs unquestionably have a place in the real estate ecosystem. Still, they may be a bit too passive for the tastes of many.

Online Real Estate

Online real estate investments are a relatively new form of funding real estate purchases, also known as crowdfunding. Using online platforms, individuals will invest in purchasing a property that an outside entity has managed. These platforms allow you to invest in projects that are (hopefully) being run by professionals. In addition, you can invest in a class of projects, a specific asset, or a range of assets. In this regard, you can access a variety of investment projects that you would not have been able to access otherwise.?

On the one hand, the barrier to entry is low, and the return potential is high. On the other hand, however, since these are done online, the process is screened only by whatever the investor turns over to the online platform. As a result, whatever homework you do, you may invest in a firm or a fund that is less than stellar. As a result, you may lose your money or not see it grow as much as you would have if you had invested it elsewhere. Furthermore, these funds tend to have high management fees, and your money may be locked for a certain amount of time, thus preventing you from being able to access it in the future.?