Private Equity Real Estate Investments – 5 Things Every Investor Should Review Before Investing
Published on: Friday, December 18th, 2015
Private equity real estate investments can be very lucrative and exciting to get involved in. They can provide an investor with ownership in a high quality property that they could not buy on their own. They can provide very strong returns on their investment capital. They can also allow an individual to partner with a very experienced Managing Member or Sponsor who will find the opportunities, take care of all the operations, put the financing in place, and even fix those pesky “leaky toilets”. Their is a reason that some financial gurus refer to them as the “investments of the rich” and why over 90% of the Fortune 400 retain at least some of their wealth through real estate. Investment real estate is a great way to protect your current wealth, provide for an additional income stream, and even grow your equity.
Before investing in a private equity real estate investment, there are 5 things every investor should review.
These documents help you perform your investment due diligence in a very professional manor. They should explain where your investment capital is going, how it’s going to be used, as well as how and when you’ll be getting it back. They will detail who is responsible for the daily operations, tell you what happens when different situations arise during your investments, and even outline potential risks. These investment documents are very detailed and expensive to put together. They will even tell you about the Managing Member/Sponsors background and history. They separate “the guy next door with an idea” from the “professional” real estate investment company.
5 Things every potential private equity real estate investor should review before investing
- Business Plan/Property Offering – The business plan or offering goes over all the details of what you are investing in. It typically includes information on the type of property desired or the property itself, financial analysis, operations, market analysis, and investment objectives.
- Private Placement Memorandum (PPM) – This is a legal document stating the objectives, risks and terms of the investment involved with a private placement. This is a legal document outlines the type of investment, detailed description of the business, financial overview, management or sponsor biographies, sources and uses of funds, and risks to name a few. An offering memorandum serves to provide buyers with information on the offering and to protect the sellers from the liability associated with selling unregistered securities.
- Operating Agreement (OA) – Most private placement opportunities are created with a Limited Liability Company or LLC. The operating agreement is an agreement among limited liability company “LLC” Members governing how the LLC’s business will be operated. In a group investment it will cover how the investment will be operated including but not limited to how fees, expenses, and income are handled or disbursed. It will also describe when and how you can sell your ownership, when you’ll be paid back, and how the company will be terminated at the end of the investment. It is essential to review this document before investing in the group investment.
- Subscription Agreement (SA)– A subscription agreement is an application by an investor to join a limited partnership. This helps the sponsor/manager of the investment evaluate the investors’ suitability and qualifications for the investment. It is required that the sponsor/manager collects these from each of the investors in the opportunity.
- Sponsor Background/Experience – In a group or private equity investment it’s important to know who is handling the operations of the business. It’s a good idea to know who they are, what their experience is and feel comfortable with them as they will be a major factor in making the investment successful.
Private equity real estate investments can be very lucrative and exciting to get involved with. A well respected and reputable company will want you to do your due diligence before investing with them. The Managing Member/Sponsor will provide you with the documents you need to review before investing. Make sure you do your due diligence and review these 5 documents and ask plenty of questions before you ever write that check and you’ll be setting yourself up for investment success.