Private equity real estate investment firms come in different forms. The most popular ones are syndications, real estate investment trusts (REITs) and real estate investment funds.

Syndications are companies that purchase or develop income-producing real estate. They acquire or build rental properties by using cash invested by passive investors.

The company is entirely responsible for property acquisition, management, and sale. Passive investors aren’t able to influence any decisions regarding the company’s operation.

In exchange for their investment, passive investors get preferred income paid on a regular basis (most often quarterly).

Syndications can be structured as LLC or REIT (real estate investment trust), among other forms.

Real estate investment funds work similarly. But the difference between them and syndications is that funds invest in other real estate investment firms rather than directly in properties.

Real estate investment funds don’t own real estate. They own shares in companies that own real estate.

In real estate investment funds, passive investors don’t get regular payments.

Instead, they either get their shares appreciated and sell them when they want or they get their investment back plus a fixed percentage after an agreed period of time.

Private equity firms that own real estate (such as syndications and REITs) make money mostly by collecting rent from tenants of properties they own.

They pay preferred income to passive investors, and the rest goes to the company’s management. This way, the rental income is shared between the passive investors and the company.

However, in addition to a share of returns, a real estate private equity investment firm may make money through charging passive investors fees for professional services.

Here are some of the most common:

Acquisition fee – This charge usually ranges from 0.5% to 3% of the deal size and covers the time and resources for finding, vetting, and closing on a property.

Asset management fee – This recurring fee is for property oversight, and it can be a percentage of committed capital or total revenues.

Disposition fee – The firm may charge a percentage of the purchase price, similar to that for acquisition, for handling the property sale.

Construction management fee – Private equity firms in the construction industry typically assess fees to cover upgrade and rehab costs, at about 3% to 6% of the total.

Performance fee – When the firm achieves a higher-than-promised return, it may receive an outsized portion of the profits (20% plus).

As you consider investing, you may ask yourself, “how do private equity firms raise capital?”

Private equity firms market their projects and services to institutional or individual investors through online and offline marketing channels.

A method that rapidly grows in popularity is using real estate crowdfunding platforms. Through crowdfunding, even non-accredited investors are able to invest in certain real estate projects.

When it comes to institutional investors, exactly where do private equity firms obtain funding?

Among others, institutional investors include the following:

- pension funds
- insurance companies
- endowments
- banking firms

First of all, private equity firms may have different structures and investment return models. Regarding this, refer to the previous question “How do private equity firms work?”.

Real estate private equity firms also differ by the type of properties they focus on. Specifically, what do these private equity firms invest in?

Historically, the majority of private equity capital has been concentrated in commercial real estate.

There are private equity firms investing in restaurants, industrial real estate, office buildings, and more. Many of them focus on multiple property types to diversify their portfolio.

Here are more examples:

- Assets of retail sector-focused firms include stores and multi-tenant shopping centers.
- Firms may also pursue office buildings or industrial real estate, including logistics properties such as warehouses and fulfillment centers.
- Healthcare real estate-focused private equity firms invest in properties like medical offices and outpatient facilities.
- Hotels are often the primary investment for a hospitality real estate private equity firm.
- Some firms focus on multifamily housing, with apartment complexes being one of the most common investments.

More recently, there has been an acceleration in investments by private equity firms buying single-family homes. These properties are usually acquired for the rental market.

Not all equity firms are created equal. So, ask probing questions like these:

1. What types of property will my investment finance? - The answer will clarify the risks and rewards.
2. What are the terms of getting my preferred return? - Find out if you are going to get regular mailbox income or one payment at the end of the term.
3. Does your firm commit capital? - When the firm has an equity stake, it’s more interested in becoming successful.
4. How are returns allocated? - Find out the pecking order for distributions to general and limited partners.
5. What are the historical annual returns? The firm’s track record can help you gauge future performance. Also, get information on any losses or underperformance.
6. What’s your fee structure? - Lots of fees can eat into your return. Those unrelated to performance don’t incentivize.

First of all, look for a list of top private equity firms in your local area in the Real Estate Bees directory. This is the easiest and most convenient way.

We collected a real estate private equity firm database containing the most reputable companies throughout the United States.

Here are a few other suggestions to find private equity firms that invest in real estate:

- Ask colleagues in your network for input based on their experience.
- Check with a real estate investment association or investing club near you.
- Get referrals from professionals who work with equity firms – financial planners, accountants, or attorneys as examples.
- Consult the membership list for your nearest chamber of commerce.