Intro to Private Real Estate Funds

01/30/2013 8:15 am EST


Matthew Leiter

Vice President of Equity Markets, GK Development

Matt Leiter discusses how to invest in Private Real Estate funds and the things you should do to research these opportunities before investing.

We're talking about alternative investments today with Matt Leiter, and specifically about Private Real Estate Funds and what those are. So, Matt, first of all, just define for me what a Private Real Estate Fund is.

Well, a Private Real Estate Fund is a vehicle by which you can invest, say, a single investment share and get exposure to a number of different real estate assets. So the idea is that you can say invest a $50,000 to $100,000 share and then participate with others to gain in the profit from real estate investments and a variety of properties.

How do I know about the quality of the person who is managing these assets? How do I determine that?

That's a good question. Well, it requires a good deal of due diligence. A lot of people rely on a financial advisor, and then there are others who invest directly.

I would recommend the former, using a real estate investment advisor or just a financial products advisor. I think that's the best bet. They'll do a lot of your due diligence for you. That's probably a wise move to engage a real estate or investment advisor.

Is this different from getting a little bit of diversification if I go out and just directly buy a strip mall, perhaps, or buy a portion or ownership of a hotel? What's the advantage of doing it this way?

Well, that's a good question too. While you can do your own real estate investing in terms of finding a property to invest in, the problem is that you may not be a real estate expert...and real estate is a complicated business. You have to manage all sorts of risk, and I think that real estate professionals and investment professionals who have been in the business for years are the best served to do that for you.

The problem is that you really need to do your due diligence on who that investment is made with. There are a number of different ways that you can evaluate that. But again, I'd go back to choosing a good financial advisor who does a lot of that underwriting and due diligence for you. That's probably your best bet.

And in terms of fees, what can I expect to pay for being exposed to this kind of asset?

I suppose you're talking about the fees related to if you make an investment, what fees are taken out of the investment you make before it's deployed into the asset. Well, typically, it's going to be anywhere from 5% to 10%.

Loads, as they call them, or fees on these investments are going down because the market is getting a little leery of making these or actually having these fees not go toward the investable asset.

Finally Matt, how does it differ from a REIT, which a lot of people have actually heard of?

Right, a REIT. So there are two different types of REITs. There is a publicly traded REIT, which is a lot like a stock. A stock can be sold at any time. They call that liquidity. It's an investment with total liquidity.

REITs can be traded, or they can be nontraded. Nontraded REITs are illiquid. They cannot be traded at any time you choose. So in other words, you're in those investments for a period of time.

Then finally, there is the third option which is a Real Estate Investment Fund, which is not a registered product. It's typically in the form of private direct participation, as they call it. The most recent trends are favoring these private investments, and the reason is there are some incentives for managers of REITs that can sometimes drive their own behaviors. So they may be incentivized to make an investment in a real estate asset that isn't in the investor's best interest.

So you have to consider these other options today. Private real estate is a little bit more easily underwritable. There is more transparency associated with it. You can look at an investment and know directly where your can look at an investment you're making and know exactly where that investment is going.

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