- Real Estate Agent Specializing In Investment Properties
- The Essential Steps For Property Due Diligence
- Real Estate Private Equity (repe)
- How To Properly Sell Your Investment Property In Odelzhausen Before Divorce
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Real Estate Agent Specializing In Investment Properties
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Real estate private equity (REPE) refers to firms that raise capital to acquire, develop, operate, improve, and sell buildings to generate income for their investors. If you’re familiar with traditional private equity, real estate private equity is the same, but with buildings.
As the “private” in “private equity” implies, these firms raise capital from private investors and allocate the capital to invest in real estate. There is little standardization as to how real estate private equity firms are structured, but they all generally engage in five core activities:
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Capital is the lifeblood of any investment firm – without capital to invest, there is no firm. Capital raised by real estate private equity firms comes from limited partners (LPs).
LPs typically include public pension funds, private pension funds, endowments, insurance companies, funds of funds and high net worth individuals.
There are many types of firms focused on real estate investing. Here we are focusing specifically on REPE as opposed to REITs or other types of real estate companies and below is a list of top real estate private equity firms (Source: perenews.com):
Like traditional private equity firms, real estate private equity firms raise money from limited partners (“LPs”) – these are private investors (usually pension funds, university endowments, insurance companies, etc.).
Real Estate Private Equity (repe)
As an important nuance, REPEs pool capital into specific “funds” (think individual investment vehicles run by a single firm). These funds have their own “mandates”, meaning they have specific types of real estate investments.
Another important thing to understand is that REPE funds are “closed-end funds”, meaning investors expect to get their money back (ideally with a hefty return on investment) within a specific time frame – usually 5-7 years.
This is in contrast to open-end funds raised by real estate investment management firms such as JP Morgan Asset Management and TA Realty, which have no end date and therefore offer greater flexibility to the manager.
In cases where institutions are not organized in this way, their specific investment funds usually are.
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Many REPE firms organize themselves according to risk profile as their driving investment strategy. They carve out a portion of the risk/return spectrum and focus on transactions regardless of asset type and geography that fit specified risk profile and return targets.
The most advanced types of real estate private equity fund strategies are called “opportunistic” or “value-enhancement” and refer to higher risk/return type investments than the more conservative “core” or “core-plus” strategies. In the figure below, you can see the target return profile across these different strategies.
This is an effective way for REPE firms to organize themselves because it sets clear expectations for the firm’s investors and allows managers to diversify risk across geographies and asset types.
When you hear terms like “opportunity fund” or “targeting core investments” they are usually referring to risk profiles and return targets.
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REPE firms generally do not restrict themselves when it comes to asset type. In the scenario they did, a firm would focus exclusively on one asset type, such as hotels, and diversify their investments in other asset type sectors.
Many REPE firms organize themselves by transaction size, which is largely informed by the amount of assets under management (AUM) but can also be part of the firm’s strategy.
Transaction size relative to AUM affects diversification and overhead (how many employees are needed to close a target number of transactions).
If a firm has a large amount of AUM, it is likely to focus on larger transactions to keep the number of deals necessary to fully deploy its capital to a reasonable size. A firm with a small amount of AUM is likely to focus on smaller transactions to achieve the desired amount of asset diversification.
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If a firm has $500 million in AUM and is focused on transactions that require $25 million in equity, the firm would need to purchase 20 properties to fully deploy its capital. On the other hand, if the same firm with $500 million AUM focuses on transactions that require only $10 million in equity, the firm would need to purchase 50 properties to fully deploy its capital.
Many REPE organizations choose to organize themselves by geographic location. There are several benefits from a strategic perspective, such as developing a high level of expertise in an area and gaining a deep network. From an operational perspective, this requires fewer offices across the country (or the world) and reduces the amount of time employees have to travel to visit properties.
However, a restricted geographic focus reduces the level of diversification and the number of potential transactions. Many small firms are organized in this way, and larger firms tend to cover more geographies, which they do from different offices that are geographically concentrated.
Traditionally, REPE firms have been thought of as equity investors. But REPE can also follow debt investment strategies where investments are made in different parts of the portfolio structure. Many REPE firms invest in both equity and debt.
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Like non-real estate private equity, REPE deals require a team to execute. Below is a breakdown of roles and job types in real estate private equity.
Responsible for sourcing and executing deals. The acquisition role is considered the most prestigious role in real estate private equity. Senior acquisition professionals focus on sourcing, while junior acquisition professionals provide financial modeling and deal execution horsepower.
Responsible for raising funds to be invested in the first place and maintaining communication with existing investors.
Real estate acquisitions involve the sourcing (senior deal professionals) and execution (junior deal professionals) of real estate transactions. The day-to-day responsibilities of an acquisition professional include:
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Onsite property tours are an important part of real estate investing, and in many firms, junior acquisition professionals can expect to spend a good amount of time traveling to various properties. During the contract execution phase, acquisition professionals focus their attention on due diligence and legal team support.
The extent to which junior professionals are involved varies by due diligence and law firm. The distribution of time across these activities depends on how active the firm is in allocating capital, so there is no typical day in the life.
At junior levels, most of your time as an asset manager is spent executing business plans for the assets you are responsible for – which can vary by asset and risk type.
For example, if you are the property manager of an industrial warehouse, your responsibilities might include talking with property management to understand how the property is performing, working to sign new leases to maintain occupancy, touring the property at various times throughout the year and speaking with them. Brokers can understand the market and sell the property today.
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However, if you are the property manager for a multifamily development opportunity, your responsibilities may include working with your joint venture partner to ensure the property is being built on time, hiring a property management team to lease the property, and conducting research. To determine where the rent should be set.
In asset management, you play a role in getting new investment opportunities by helping with due diligence. If a new asset is to be acquired, asset management may engage in reviewing historical financials and a competitive set to see what to expect in the future, hire an asset management team and sign contracts with sellers.
Another big part of property management is selling properties. Property management is responsible for working with portfolio management to determine the most appropriate time to sell the property, engage the brokerage team, create a disposition memorandum outlining the thesis for selling the property and successfully executing the sale.
Some firms combine acquisition and asset management roles (known as “cradle-to-tomb”). This is more common in smaller organizations and has its pros and cons. In organizations a