Real estate investing is an increasingly favored method of wealth-building, and there are multiple ways today to invest in private real estate.
Investors who don’t want the responsibility of managing tenants, toilets and termites themselves choose either private equity funds or real estate investment trusts (REITs).
High net worth individuals holdings in PRIVATE real estate hits record highs. A Tiger 21 reported by Bloomberg of high-net-worth investors showed they had an average of 33% of their portfolios in private real estate investments.
Traditionally, private equity real estate opportunities have only been available to institutions.
Early on I founded Cardone Capital to allow my wealthy family and friends to invest alongside me. Today, we have opened this opportunity of providing institutional-grade commercial real estate properties available to both my wealth “accredited” investors and all my friends who follow me on social media who are non-accredited.
My personal success investing in real estate over thirty years now is a testament that private equity real estate funds are smart investment vehicles for those who want to protect their wealth, create passive income flows for themselves and their estate while they patiently wait for appreciation through rent growth.
Just this year we created two funds for our investors, one which produced a 121% return to investors in under 42 months and the other did 3.45 X return on capital invested. That’s 345% over a four year time period.
Over my career investing in a very specific real estate type I have achieved well over the 15% annualized net returns we promote in our offerings.
While I can’t guarantee this level of success, I believe for many reasons the private equity real estate fund will almost always out achieve the private REITs for a variety of reasons.
1. Fees to Promote Funds.
Private REITs have been notorious for their high fees—with many sharing 10% with brokers. This upfront expense becomes almost impossible to recoup and offers no value to the properties or investors.
In fact the Financial Industry Regulatory Authority (FINRA) now requires private REITs to provide statements to investors showing this drop immediately. This disclosure and public awareness apparently had a negative impact with the public, with private REITs raising almost eighty percent less in funds.
Meanwhile, more cash is flowing into private equity real estate, like Cardone Capital. I refuse to pay any fees or commissions to brokers, reducing ALL the cost of middle men.
My company uses social media crowd funding to create awareness of the deals we are investing in. That way ALL of the investors dollars are invested in the properties.
2. We Buy, Then You Invest.
With a REIT you invest money upfront before the properties are purchased and most of the time you don’t know what property you are invested in.
With the REIT the theory is you buy a diversified pool of properties, but in practice, REITs don’t start off with a pool of properties and they must start paying dividends to their investors— so, REIT managers have the propensity to invest in properties to generate dividends to pay the investors.
Instead, an entrepreneur-run private equity real estate fund seeks property that provides all the conditions of a great investment; cash flow, location, job growth, rent growth and view of the future so you can exit with a profit.
3. Tax Advantages.
With a Real Estate Investment Trust the investor is invested in a convertible stock certificate unlike the private equity investment that makes the investor a partner in the property, with the full backing of the real property.
In a private equity fund you are a partner in the property rather than a holder of a piece of paper.
The tax implications provides a massive benefit to the investor of a private equity fund over REIT.
4. Monthly Cash Distributions.
Private REITs typically pay every quarter whereas a good private equity firm who manages cash flow and is personally invested in the properties is motivated to pay investors out monthly as they are motivated to pay themselves.
As a real estate operator investing in a property I want to be paid monthly. If there is cash flow I demand we distribute monthly to the investors.
5. Private Equity Mentality vs REIT Mentality.
The mindset of of private equity fund manager is about investing in real property, not the day to day value of a piece of paper created by Wall Street.
In REITs profits take a back seat to Fees. REITs generate most fees through transactions and the SEC warns that deals can be struck just to generate fees.
The private equity fund manager is driven by finding the right real estate assets that can produce cash flow over long periods of time and create appreciation for the fund manager and the investors.
Whereas the REIT mentality is fee driven whereby they get to keep their jobs and fees are based on trades not the asset itself.
The mindset between the daily value of a piece of paper and the long term operation of a property changes everything. As an asset operator and manger, I am interested in maximizing the growth potential of the property through rent growth and then finding the right buyer at the right time to exit to accomplish our targeted internal rate of return.
One of the great benefits of real estate investing is the number of tax advantages provided through depreciation and long term capital gains.
REITs do NOT share these tax advantages with its investors and instead each year send you a 1099 form, as though you work for them.
The private equity firm passes all tax benefits on to its investors, including depreciation and capital recapitalization, while REIT payouts are taxed at an investor’s higher ordinary income rate and no depreciation deductions are passed on.
Lastly, The Journal of Wealth Management points out REITs have underperformed the market over the last 10 years.
How To Get Started
Although most private equity real estate funds are available only to institutional investors, there are a number of crowdfunding real estate websites but very few of which offer partnerships to both accredited and non-accredited investors.
While it can be overwhelming to separate the good real estate managers and investments from the bad, investors should do their homework. When doing your research ask about the Deals you are investing in, not just the terms.
Lets face it, your upside in real estate is determined by the real estate.
At Cardone Capital, I personally look at a hundred deals to put a few under contract. And when I do, I assume I am invested in this asset whether anyone invests alongside with me. Look for funds that are investing in the products they are promoting.
Also, the more transparent and available the executives are the better.
Pictured above, Stella at Riverstone—Cardone Capital’s most recent acquisition.
Always choose investment firms that provide transparency and availability regardless of the size of your investment. When discussing fees, be interested in how the fund manager is compensated.
Are the fund managers driven by fees or compensated by profits?
It has always served me to pay the fund manager on profits!
Our offerings under Rule 506(c) are for accredited investors only.
GENERALLY, NO SALE MAY BE MADE TO YOU IN THIS OFFERING IF THE AGGREGATE PURCHASE PRICE YOU PAY IS MORE THAN 10% OF THE GREATER OF YOUR ANNUAL INCOME OR NET WORTH. DIFFERENT RULES APPLY TO ACCREDITED INVESTORS AND NON-NATURAL PERSONS. BEFORE MAKING ANY REPRESENTATION THAT YOUR INVESTMENT DOES NOT EXCEED APPLICABLE THRESHOLDS, WE ENCOURAGE YOU TO REVIEW RULE 251(D)(2)(I)(C) OF REGULATION A. FOR GENERAL INFORMATION ON INVESTING, WE ENCOURAGE YOU TO REFER TO WWW.INVESTOR.GOV.