The Secret to Financing Real Estate Private Equity
Expecting a large return on real estate properties, but need funding to attract more capital? Fortunately, there is a secret way to finance real estate private equity.
Commercial real estate can be intimidating.
For your company to continue to innovate and grow, source investment opportunities to attract the capital your business needs.
What should you do to effectively source these opportunities?
Finance private equity. Private equity is a collective attempt to gather private investors.
The secret way to finance real estate private equity is to consider equity real estate partners or commercial real estate investors to fund your real estate deals.
Use private equity deals to your advantage. Consider presenting to a joint venture real estate partner. Presenting your project can be a daunting task, but is not impossible.
Real Estate Private Equity Deals
Real estate private equity deals offer an opportunity to receive necessary funding for your property.
Draft a commitment contract to ensure all terms are clearly expressed in the private equity deal.
Decide what percentage of the initial investment capital you’ll need upfront from investors and, in exchange, offer them a capital and ownership percentage of the property. These percentages will be the basis of their commitment to your fund. When that property is sold, the contract should state what portion of those percentages will be returned.
Although these real estate deals will vary, they all have one thing in common. Like you, equity investors need to see an opportunity for a large return.
Private equity is usually allocated in different amounts throughout the years of the investment. If your properties are profitable sooner than expected, investors will be paid back earlier. This depletes the risk of failure and boosts their equity portfolio.
There are different types of real estate investors so be sure to choose the one that would give your business the most benefit. One of the most lucrative investment opportunities is to work with a joint venture real estate partner.
Joint Venture Real Estate Partners
The joint venture real estate partner that you choose should have a certain caliber of experience. These investors should maintain an impressive equity portfolio.
Also, keep in mind that their management style, references, and market sources will affect your partnership. If you choose a difficult, inexperienced partner, you are prone to have trouble throughout the commitment.
Set high expectations for their portfolio. You want to ensure you receive the best funding to generate the most profitable return, as these are long term business relationships.
Every commercial real estate company is different, which means your needs will be different. You may need $2M or $10M for capital funding. Regardless, you want to be sure the equity partner you choose can provide the amount stated in their commitment to your fund.
At Clopton Capital, we like for real estate private equity joint venture deals to have:
● Strong sponsors with a successful track record
● All real estate asset classes
● Nationwide geography, including primary, secondary, and tertiary markets
● LP and GP positions
● Equity ranges from $1 – 30 million
● Up to 90 – 10 contribution
● Value – add, development, and long term hold
Analyze your profits and track record to determine what type of funding your business needs.
Benefits of A Joint Venture Real Estate Partnership
Both commercial real estate companies and joint venture real estate partners benefit from a real estate private equity deal.
Benefits for Equity Real Estate Investors:
● Broadly diversify their equity portfolio, beyond stocks and bonds, without taking direct risks.
● Receive a much larger return than with a publicly traded company.
● Have an exclusive entrance into an investment that others may be unable to access.
● Gain investing experience through partnering with real estate experts.
Benefits for Commercial Real Estate Companies:
● Easily raise initial capital needed for your fund.
● Reach success with your properties faster than average companies.
● The control to request how much of the investment you need as you analyze your property’s needs.
● Leverage to access other markets.
All contracts have risks, but aim to outline any concerns in the commitment. The most important thing to remember is to ensure the benefits of your partnership can outweigh the risks.
Risks of A Joint Venture Real Estate Partnership
Like all investments, you run a risk of losing profit. This loss can be endured on both sides of the partnership.
Risks for Equity Real Estate Investors:
● Lack of liquidity for the time period of the investment.
● Failure of the real estate property.
● Change of management in the company.
Risks for Commercial Real Estate Companies:
● Restricted decision making beyond the commitment.
● Overly busy investors can become unreliable.
● Mixed management styles can cause friction in the partnership.
Most of these risks are avoidable. Make it easy to exhibit the benefits of the partnership by setting aside an extended period of time to finalize it.
Financing Private Equity
Without the appropriate funding, you will be unable to purchase the properties needed to maintain a successful commercial real estate business.
When choosing a joint venture partner, review equity portfolios before finalizing your decision.
Identify the percentages needed for the capital contribution of the investment. Be fully transparent to negotiate the terms of your real estate deal.
Joint venture partnerships are mutually beneficial. Both parties will create and accept an initial commitment to share the gains and losses of their private equity investment.
When a property is successful, you both reap the benefits.
Want to learn more about our real estate private equity programs?
- Clopton Capital
- August 6, 2018