Types of Investment Vehicles

This article will discuss investing vehicles as it pertains to commercial real estate, more specifically apartment communities.

There are several types of avenues to invest in apartment communities. This article will highlight each one, and then go into further detail.

The first vehicle is a real estate investment trust or REIT.  There are public REITs and private REITs.

The next vehicle would be a private equity firm. Specifically, there can be small firms, or robust firms.  An example of a robust firm would be Blackstone or Blackrock that have billions and billions of dollars of assets under management.  A small firm example would be a local firm that pools private investor capital to invest in one off multifamily projects.

Another vehicle would be a real estate fund. A real estate fund is a specific pool of capital that's raised for investing in multifamily investment property.  A real estate fund can be an equity fund or a debt fund.  The fund documents and prospectus will outline the specific parameters of the type of deals the fund administrators and partners plan to pursue.  Funds structures tend to be very rigid and rarely can pivot to others types of allocations that are not outlined in the fund legal documents.

Syndication is another vehicle used to invest in multifamily assets.  A syndication is a one-off private investment that is formed by a general partner(s) who is called the sponsor and they raise capital from a pool of investors for one specific investment.  These investors are known as limited partners (LP’s).

A syndication is a one-off private investment that is formed by a general partner(s) who is called the sponsor and they raise capital from a pool of investors for one specific investment.

Lastly, the newest vehicle in the investment marketplace are crowdfunding platforms.  On these platforms, investors can pool their money, just like a syndication, but in smaller increments - starting with $500.  These platforms are middlemen that connect real estate investment companies that are raising capital for their projects and investors looking to invest in projects seamlessly.  The platforms are paid a fee for their service.

The above serves as a brief overview of the various investing vehicles for commercial real estate/apartment communities. Below we will expand on each type.  

A real estate investment trust, or a REIT, is publicly traded, usually on an exchange, for example, the New York Stock Exchange, where you can invest in commercial real estate.  This is like investing in a stock. The investment is liquid versus illiquid. The REIT must distribute 95% of cash flow back to the investors at the end of the year. Because they are publicly traded, offering prospectus documents defines how the real estate investment trusts operate.  As we’ve covered in other articles within our library, typically, real estate investments are illiquid, and the time horizons of these real property investments can be three to five years, if not longer. Real estate investment trusts pioneered having real estate investments be liquid. The trusts will go to the public market and raise millions and millions of dollars for projects and operations.  With those funds they will go invest in assets. Your position in those investments, for however many shares that you purchase, can be traded like a stock.  This is attractive to investors who like real estate but don’t want their capital tied up for long periods of time.

Real estate investment trusts pioneered having real estate investments be liquid.

Next, let’s unpack private equity.  Private equity firms are firms that pool capital from investors for the purposes of investing in companies and private real estate investments.  These firms are not publicly traded, and they are relationship driven.  Their goal is to find experienced sponsorship real estate operators and continually invest with them.  This benefits you as an investor because these firms’ day to day activities include sourcing operators and deals, analyzing those groups and deals, providing equity financing, and then overseeing the project to completion.  Once completed they will provide you as an investor with a return on your investment.  The firm profits through asset management fees and a profit split for the effort of finding, investing in and overseeing the operating partners and deals.

A common investing vehicle used in real estate is syndication. A syndication is a form of private equity investing via a private investment vehicle called a private placement that is used for a single projects.  There will be a project sponsor, or general partner and limited partners.  The general partner is the captain of the ship and typically has majority control over decision making regarding the project.  The limited partners invest in the private offering via purchasing “shares”.  Limited partners typically have very little say in how a project goes and in the day-to-day decision-making process.  Syndication is attractive because general partners usually have the expertise of sourcing, analyzing, financing, and executing deals and investors or limited partners want access to these types of deals.  LP’s generally do not want to do much but reap the rewards of successful projects.  The birth of Crowdfunding has shined a spotlight on the syndication business model and brought this once private business to the forefront of real estate tidal wave.

Lastly, Crowdfunding platforms have taken the syndication model, even the private equity fund model, and thrown gasoline on the fire. They have created enormous platforms where they're connecting some of the largest investment firms in the nation to investors. These crowdfunding platforms have hundreds of 1000s of investors.  The wave of the future is the crowdfunding model where the access of information and deals is right at your fingertips.   With the click of a button, you can go and review a deal and invest. Gone are the days of having to know someone in real estate that you can invest alongside.  

There are many vehicles for you as an investor to pursue multifamily apartment community investments.  You should consider your risk tolerance and investment thesis to determine which one is best for you.

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