Private real estate investment offers a profitable passive income for doctors, making it a recommended form of investment for high-earning medical practitioners.
However, as with other investment types, this opportunity comes with pros and cons.
Choosing an investment that suits your personal and financial situation can help you maximize and multiply your savings.
If you’re considering investing some of your savings in real estate, learn more about private real estate investments and see if they fit your investment needs and capacity.
Key Takeaways
- Private real estate funds involve pooling investor money for property acquisition or development.
- Various fund types offer differing risk levels and returns, from Core to Opportunistic.
- High returns, diversification, tax benefits, and professional management attract high-net-worth investors.
- Consider high upfront costs, long lock-up periods, fees, and risks before investing.
Table of Contents
What Is a Private Real Estate Fund?
Private equity real estate investing involves a firm raising money from investors to acquire or develop properties to be sold in the future.
The process includes a general partner (GP) or sponsor, who creates the fund, and limited partners (LPs) or outside investors, who invest equity.
The LPs are usually institutional investors, private accredited investors, and high-net-worth individuals like doctors since the minimum contribution is $250,000.
A manager or controlling partner often handles the private real estate funds.
They ensure that the funds are actively managed and invested in various real estate developments.
These properties include office buildings, retail properties, shopping centers, industrial properties, multifamily apartments, and niche property investments, such as undeveloped land, medical offices, hotels, student housing, manufacturing space, and more.
Types of Private Equity Real Estate Investments
If you’re interested in private equity investment in real estate, explore the different types of funds available, and see which one suits you.
Core
Core funds offer a conservative strategy where there’s less risk and a predictable cash flow but lower returns (six to eight percent net equity internal rate of return to LPs).
This type of fund often invests in low-risk, low-potential properties in popular or well-populated locations or high-value, high-quality real estate assets with little maintenance.
Core Plus
Core plus funds provide slightly higher returns (eight to 12 percent net equity IRR to LPs) but with slightly more risk.
It involves high-quality assets in secondary locations or risky assets in primary locations. The properties often require enhancement or value-added activity.
Value Added
Value-added funds involve buying properties, doing a bit of redevelopment, and selling them to the real estate market at the right time.
The funds have a medium-to-high level of risk but high potential returns (11 to 15 percent net equity IRR to LPs).
Opportunistic Funds
This type of fund involves alternative investments, like underperforming markets, redeveloping outdated or vacant buildings, or undeveloped land.
As a result, it offers the highest level of risk but the highest level of returns (over 15 percent net equity IRR to LPs).
Private Equity Real Estate Fund vs. Real Estate Investment Trust
Private equity real estate shares some similarities with a real estate investment trust (REIT), making it confusing for some.
Both offer a passive way to invest and earn from real estate, but REIT differ in its nature and process.
For one, REIT involves publicly traded shares, making it highly liquid or quick to sell.
Meanwhile, private equity funds can’t be sold quickly since they need to be held for several years.
In addition, REIT has strict regulations while a private equity fund has less strict requirements.
Lastly, REIT has a lower minimum investment, making them more ideal for most individual investors.
The Benefits of Private Real Estate Investing
Explore the four perks of investing in private real estate.
High Returns
Many institutions and high-income earners choose to invest in private equity real estate, due to its high returns.
Yahoo reports that private equity real estate produced average total annual returns from 17.4 percent to 25.56 percent in the past nine years, while the FTSE Nareit All Equity REITs index had an average total return of 12.42 percent.
If you want to maximize and multiply your money despite the high risks, consider investing in private equity real estate.
Diversification
Thanks to the large sum of money, most firms or sponsors can put the pooled investment funds into diverse assets or properties.
Investing in multiple markets and properties lowers the risks of affecting your entire portfolio throughout the market cycles.
Moreover, investing in diverse properties lets you discover a broader base of profitable investment opportunities and grow your money.
Tax Benefits
This investment opportunity enables U.S. taxable investors to save on taxes.
Unlike investments in other asset classes, you can gain benefits like depreciation deductions, deferred taxes through incentive programs, and long-term capital gains tax treatment.
Investing in real estate, especially short-term rentals, is one of the common tax planning strategies for doctors.
It helps them save more of their income through tax deductions or after-tax returns.
Fund Managers
A real estate fund manager or team of experts oversees the investment portfolio, from pooling the money to mitigating risks.
They’re responsible for investment strategy, portfolio management, risk management, making informed decisions, and more.
More importantly, their presence lets you earn passive income without much knowledge, experience, time, and effort.
However, make sure to look for a credible fund manager with the right expertise and experience to grow and protect your investment effectively.
Some Considerations Before Getting Into Private Real Estate Investments
Although investing in private real estate is generally recommended for high-income earners, there are still a few conditions that you should be aware of.
Take note of these factors before investing.
High Upfront Commitment
Investing in private equity real estate funds requires a large initial investment.
It’s also a need-based investment, where you pay the capital you committed to the GP on an as-needed basis.
If you fail to meet a capital call, your legal obligation as an LP to provide the GP with your committed fund, you may be forced into default and forfeit your real estate share.
Consider this factor, especially if you can’t commit to fulfilling a large amount.
Long Lock-Up Periods
Besides the high capital commitment, this investment fund has long lock-up periods lasting from five to ten years, with some lasting for more than a decade.
Some funds may extend the term for one to two years at the GP’s discretion to avoid selling the assets in unfavorable economic conditions.
In those years, distribution can be slow and low since it comes from cash flow, not liquidation. Investors can’t demand liquidation.
Extra Fees
A private equity fund also requires you to pay the management and performance fees.
Firms commonly have an annual fee of two percent of capital invested, regardless of the fund’s performance.
For example, if the firm or manager raises $1 billion, it charges $20 million annually.
The firm uses the fee for employee salaries, legal services, data and research costs, marketing, and other costs.
Many fund managers also charge a 20 percent performance fee if the fund exceeds a preset base threshold, which could be a percentage or a benchmark, such as the bond index or return on equity.
Higher Risks
Strategies for opportunistic and value-added properties offer high returns, but the risks are also equally high.
If the fund isn’t managed properly, it’s possible to lose the entire investment if it underperforms.
When choosing a type of fund for private equity real estate, understand your risk tolerance first to know which fund to choose.
Remember that all investments have some degree of risk, so identify how much you’re willing to lose.
When Is the Best Time for Medical Professionals to Invest in Private Equity Real Estate?
The best time to invest in private equity real estate is when you understand how it works and if you have enough money to commit.
Knowing the factors that affect the real estate market, such as the economy, demographics, interest rates, and government policies, can help you plan when to invest, where to put your money, and how much you can invest.
Ultimately, proper financial planning will enable you to diversify your investments, build long-term wealth, and minimize risks.
Is Private Real Estate Investing Worth It for Healthcare Professionals?
Generally, private real estate investment is worth it for doctors and high-earning medical practitioners, given its high returns.
However, profit shouldn’t be your only factor when choosing this investment opportunity.
Before investing in private equity real estate, make sure you understand the pros, cons, and processes, including the handling of cost and investment structure.
Consider speaking to a financial advisor to guide and help you throughout the process.
Talk to a Financial Advisor today, and start managing your finances and savings!
