Investing Fundamentals

Investing in private equity real estate

How private equity real estate investments differ from other investment types.

by CrowdStreet

In this video Ian Formigle, Crowdstreet's Chief Investment Officer, takes a look at the value of investing in private equity real estate and the differences investors need to know between this investment type and others.

By building an online commercial real estate investing platform. CrowdStreet is creating a new way for investors to invest. I'm Ian Formigle, and I'm the chief investment officer of CrowdStreet. CrowdStreet is an online real estate investment platform giving investors across the country direct access to private real estate investments. 

We believe that commercial real estate can offer investors a great way to help them diversify their portfolio. What drives the value of commercial real estate can be different than what drives the value of the stock market, and that's because commercial real estate's value can be tied to its rents and rent escalations can be accelerated during periods of high inflation. 

Generally speaking, the faster a property can adjust its rents upwards the better it can maintain pace with inflation. It is possible to earn an annual yield yet at the end of the year report a taxable loss. And that's largely due to the fact that commercial real estate in its private form is taxed as a limited partnership. 

The offerings on CrowdStreet's marketplace are private equity investments. Typically speaking, the value of that particular offering is often times driven more by what's going on at the property level than what's being reported in the news. 

Conversely, public equities are traded daily on national exchanges, and that means that they can be subject to the whims of public perception. Investors often think that real estate investment trusts or REITs and commercial real estate private equity are the same thing, and the answer is they're not. 

REITs were formed in 1960 by Congress as a way to take a portfolio of properties and turn them into a company which could then turn around and sell shares to investors. So what we see in REITs, a lot of times is that they're publicly traded and the most important consideration for investors to understand is that when they invest into a publicly traded REIT, they're investing into the entire company, not just the portfolio properties but the management team itself. 

Commercial real estate private equity is what we call more of a pure play investing in the equity itself. In that particular deal you're often times hiring third party managers but you're not investing in the management team. 

When investing in single family residences, in many regards we would consider this hands on investing. For most people this means buying a rental home. You're managing the property, you're fixing it up, you're dealing with tenants. Investing in single family homes, as a landlord can be profitable. But in many regards, we would say that you earn your return. 

In commercial real estate it's a more passive approach. You're entrusting your money to a company that is sponsoring the project who will go out and execute the business plan on your behalf to hopefully deliver a return. 

At CrowdStreet, we believe that education is paramount to the path of becoming a sophisticated real estate investor. You can find a wealth of information on our website
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