Investing in real estate offers investors the ability to increase their net worth, generate passive income, save on taxes, and even hedge against inflation. With these benefits in mind, it’s no wonder that real estate investing is so popular. A recent Bankrate survey shows that real estate is Americans’ favorite long-term investment.

Additionally, there are many different strategies that you can take when putting your money into real estate. For example, investors can choose to:

• Own a rental property
• Flip houses
• Invest in REITs (Real Estate Investment Trusts)
• Rent out property to Airbnb customers

The list goes on and on. However, when it comes to investing in real estate, there might be one category that stands above the rest: private equity real estate.

Let’s dive into investing in private equity real estate and examine why this strategy is so lucrative.

What is Private Equity Real Estate?

Private equity real estate is when a real estate firm pools together capital from investors, such as accredited investors and institutional investors.

Private equity real estate is usually exclusive, and an investor must usually make a minimum investment. Oftentimes, this investment must be at least $250,000. This may sound similar to a real estate investment trust (REIT), but there are some key differences.

To start, a REIT investment can be highly liquid because of the nature of it being traded publicly on an exchange. On the other hand, private real estate funds often require the initial contributions to be held for several years. Also, REITs are highly regulated while private equity funds don’t face the same level of regulation or strict requirements from the government.

A good example of the type of firm that offers private equity real estate funding is Blackstone Inc. They are a world-renowned private real estate investment company that offers real estate investment opportunities to its high-net-worth clients. These types of opportunities might include apartment buildings, logistics warehouses, or even water parks. As you might guess, these types of real estate properties can be highly lucrative and offer investors high returns on their investments.

With that in mind, let’s expand on the first major benefit of investing in private equity real estate.

Benefit #1: Private Real Estate Generates High Absolute Returns

A high absolute return takes into account appreciation, depreciation, and cash flows to measure the amount of money an investment earns over time. In other words, it’s the total percentage that an investment increases or decreases over time.

Looking at data from Preqin, a private debt database research company, a $100,000 investment in private real estate beginning in early 2001 would have returned around $380,000 by March 2017.

For reference, that same $100,000 investment in the S&P 500 would only be worth $255,000 in March 2017. See the chart below from Preqin below.

Benefit #2: Private Real Estate Offers Portfolio Diversification

Another major benefit of private equity real estate is that it offers diversification for investors. In other words, it offers a way for investors to avoid the daily ups and downs of the stock market and ensure that their total net worth is spread out across a number of different assets.

On top of that, there are many different ways that investors can diversify within real estate. For example, they can pursue different types of properties (retail, residential, commercial, etc.) or strategies (core, value-add, opportunistic, etc.).

Benefit #3: Private Real Estate is Tax Efficient

When you reach a certain net worth, investing usually becomes more than just focusing on your investment’s returns. It also becomes a game of minimizing your tax bill. If you don’t take steps to reduce your bill, then you could just end up giving away a large portion of your gains each year. This is another area where private real estate can be beneficial.

For example, income generated from properties can usually be shielded by depreciation. This offers investors a double-edged sword. They can enjoy the long-term benefits of substantial cash flow while also experiencing minimal tax burden.

On top of that, investors can also leverage techniques like the 1031 exchange. A 1031 exchange allows investors the opportunity to defer taxes indefinitely. Essentially, this tax provision allows real estate owners to sell 1 property and buy another without incurring capital gains taxes. Meaning an investor could buy and sell as many properties as they want without ever paying taxes on the gains. Deferring taxes is one of the greatest attributes of owning real estate directly.

Unique Real Estate Strategies

Investing in real estate has been growing in popularity over the past decade. However, despite the space getting more crowded, new opportunities are emerging at the same time. One example of a relatively new real estate opportunity is build-to-rent investing.

Build-to-rent homes are single-family homes that are built with the specific intention of renting them. It is a unique type of real estate transaction and can also be described as the connection between traditional multi-family homes and the single-family rental model. The properties can be bought as one-off investments or as a bulk portfolio and are virtually indistinguishable from an owner-occupied home.

New strategies like this can oftentimes be difficult to get started with if you have no experience in real estate. It would be like picking up a basketball for the first time and then immediately challenging Lebron James to a game of 1v1.

However, one relatively easy way to get started in private equity real estate is to join a real estate syndication. This is a real estate investment strategy where one or two partners source real estate deals and then pool funds from other investors who get to enjoy the benefits of owning real estate without actively managing any properties.

We hope that you’ve found learning the benefits of private equity real estate to be valuable! If you’re interested in learning more, please subscribe below to get alerted of new articles as we write them. Or you can also follow along with Avatar Equity and Sachin Maskey on social media.

Sachin Maskey is a physician, real estate investor, philanthropist, and entrepreneur. He has over 17 years of expertise in the medical industry as a family medicine specialist. Outside of medicine, he is the founder of the commercial real estate investment firm Avatar Equity as well as the Dhana Yoga Foundation. You can follow along with Sachin on Instagram, Facebook, and LinkedIn.