How does a busy individual, like yourself, find 8+ different investments for your passive portfolio?
That’s exactly why we founded Ironton Capital, and it all starts with syndication.
What is Syndication?
A real estate syndication is when a group of people pool their money together to invest in a real estate project. It’s like teamwork – each person contributes money, and together they buy properties such as apartment buildings, shopping centers, or an office building.
One benefit is that it allows investors to invest in larger properties or projects that they might not be able to afford on their own. It also spreads out the risks because if one property doesn’t do well, the losses, as well as the wins, are shared among all the investors. Additionally, real estate syndications often provide passive income through rental payments or property appreciation.
There can also be some drawbacks.
– There are often just one or two properties, which doesn’t bring much diversification to balance risk.
– Investors usually have limited control over the property and its management decisions since those are typically handled by a designated manager or Sponsor. This is usually a drawback for Private Equity (PE) Funds, too, as you’ll see in the next section.
– Investments will usually be highly illiquid, meaning it can be challenging to sell your share of the property if you need to access your money quickly. This applies to PE, too.
– Like any investment, there are risks involved, such as fluctuations in the real estate market or unexpected expenses.
Before the SEC enabled private equity funds to be more broadly available about a decade ago, syndications were the primary method by which investors got access to passive real estate projects.
What is a Private Equity fund?
What is a private equity (PE) fund? It is a type of investment that collects money from investors to buy and manage properties.
It’s like a big pool of money that’s used to purchase real estate assets such as apartment buildings, office spaces, or shopping centers. The PE fund can purchase the properties directly, or the PE fund can invest in Sponsors, who are directly hands-on with the real estate.
The fund is managed by a team of professionals who make decisions about which properties to buy, how to improve them, and when to sell them for a profit.
Advantages:
– It allows passive investors to invest in real estate without having to buy and manage properties themselves.
– It provides diversification because the PE fund may invest in a variety of properties across different locations and sectors, spreading out the risk.
– Ironton’s National Diversified Funds (NDF), for example, will have 30-40 properties in a fund.
– Investors can benefit from professional management expertise and potentially higher returns than they might achieve on their own.
Disadvantages:
– Investors typically have limited control over the fund’s investment decisions, as they are made by the fund manager.
– Real estate private equity funds often require a significant initial investment and have longer investment horizons, meaning your money may be tied up for several years.
– Like any investment, there are risks involved, such as market fluctuations, economic downturns, and the potential for losses.
And remember, it is essential for investors to carefully consider their risk tolerance and investment goals before participating in a real estate private equity fund or any investment. Always talk to your financial advisors.
How Does a Private Equity Fund Work?
There are several parties involved in this form of investment to make it go smoothly. Let’s explore everyone’s role.
Limited Partner (LP)
Individual Passive Investor like You
Here are the most common tasks for the LP:
– Chooses Fund (GP)
– Decides investment size
– Reads quarterly reports
– Re-invests or Deposits returns
– Enjoys passive financial freedom
General Partner (GP)
Private Equity Fund Manager like Ironton Capital
Here are the most common tasks for the GP:
– Monitors national & local markets
o Networks to identify opportunities; often the best deals are off-market and are found via networking
o Reviews multiple projects
o Selects optimal investments
o Negotiates favorable deals
– Performs extensive due diligence
o Sponsor reputation and track record
o Financial, operational, and additional aspects
o Site visits
o Detailed Financial modeling
– Maintains regulatory compliance
– Maintains accounting records; coordinates taxes; research tax-optimizing strategies
– Quarterly reporting to LPs
Sponsor Property Management for the Investment
Here are the most common tasks for the Sponsor:
– Selects the physical project
– Arranges and guarantees the financing
– Re-zones property if needed
– Arranges construction and engineering permits
– Oversees construction or renovation
– Manages the property
o Finds and manages the tenants
o Maintains the property
o Manages the legalities
– Manages refinancing
– Manages the sales process
– Maintains consistent quarterly reporting to the GP
When you invest in Private Equity (PE) fund, it is like investing in a mutual fund with an active manager that researches the economy and picks individual stocks to match the investor’s investment strategy. The PE fund adds a layer of expense in exchange for professional experience and expertise. The PE fund then picks individual Sponsors that are hands-on with the real estate in investments.
If you like to research and pick out your own stocks, without a mutual fund, that is like skipping the PE fund layer, and investing directly in the real estate Sponsors. That legal form is called a “Syndication” that we described earlier. There’s less expense for the passive investor, but a lot more work.
What’s best? It depends on what you enjoy, what your skills are, and what is the next best use of your time.
Fees and Expenses
Real estate private equity funds typically charge fees to cover management and operational expenses. These fees can vary depending on the fund’s structure and investment strategy but commonly include:
– Acquisition Fees:
o Some real estate private equity funds charge fees for identifying and acquiring properties.
o These fees may vary based on the size and complexity of the transaction.
– Management Fees:
o These fees are charged annually and are typically a percentage of the total assets under management, ranging from 1% to 3%.
o They cover the costs of fund management, including salaries, office expenses, and administrative costs.
– Performance Fees (also known as “carried interest” or “carry”):
o Performance fees are typically a percentage of the profits earned by the fund, often around 20%.
o These fees are charged only if the fund achieves certain performance benchmarks, such as surpassing a specified rate of return or reaching a certain profit threshold.
o Performance fees incentivize the fund manager to achieve strong investment results.
o Usually, the investor gets paid first with a “preferred return.”
– Other Fees:
o Additional fees may include expenses such as legal fees, due diligence costs, and fund administration fees.
It’s important for investors to carefully review the fee structure of a real estate private equity fund before investing, and to understand how these fees may impact their overall returns.
There are four offsets to these PE Fund expenses:
1. When a PE fund makes a large investment in a Sponsor, the fund can usually negotiate better terms than a small passive investor.
– This is called a “side letter.”
– These savings are usually not enough to offset all the PE fees, but may offset a meaningful portion of the fees.
2. Most Sponsors would prefer to work with a smaller number of large investors (e.g., PE firms), and not hundreds of smaller “retail” passive investors.
– As a result, the larger investors see many more of the best opportunities than the smaller passive investors.
– For a given amount of investment risk, these “off market” opportunities often have better returns than the typical deals in the passive investment market.
– This is where the PE funds earn their fees.
3. Most Sponsors have a “friends and family” list.
– When they have a small deal with great economics, it is never broadly circulated.
– The inner group of friends sees it and fulfills the investment need.
– Outsiders are only brought in when the inner group doesn’t raise sufficient capital.
– Established PE firms often have access to these deals.
4. Finally, there are short-term opportunities where a Sponsor needs to raise cash rapidly for an unusually good opportunity.
– The investors that the Sponsor has found to be reliable in the past are quick to decide and deliver funds get called first.
– The attractive return on these special situations usually ensures only a small number of large investors are needed before the funding is raised.
– PE firms spend a lot of time networking to establish the relationships to get access to these investments.
Ready to Diversify Your Portfolio without spending hours pouring over investment opportunities?
Book your 15min investment review at https://irontoncapital.com/myreview to see if we can help you go passive.
