The realm of private equity is home to some very niche archetypes. You like investing in promising start-ups? There’s venture capital! You are a “go big or go home” type of investor? Leveraged buyout PE is for you! You like salvaging companies falling from grace? Distressed PE is perfect! You like real estate? Then you’ll love real estate private equity!
1. What is Real Estate Private Equity?
Real estate private equity (REPE) is private equity with a focus on properties, rather than companies. REPE raises capital from accredited investors such as pension funds, insurance companies or wealthy individuals to invest, develop, and sell properties for profit. Their main products are commercial real estate (offices, industrial, retail, multifamily). Some firms also dabble in residential real estate but it is not a common practice.
You can say real estate private equity firms are glorified house-flippers, scouring for potential property deals, redeveloping them, and selling them at a higher price, albeit at a much larger scale.
1.1. How does a real estate private equity firm work?
Just like a normal private equity firm, REPE firms raise funds from limited partners, such as pensions funds, endowments or wealthy individuals to invest in properties.
An investment usually lasts 5 to 7 years; sometimes 10 to 12 years. The whole process will start with a 2 year investment period when the firm acquires a property. The next 3-5 years is called the “holding period” when the acquired asset is renovated and redeveloped to increase value. Finally, the firm liquidates the investment by selling the asset.
Sometimes to maximize returns, firms renovate and rent out their properties to gain a stable cash flow. This type of strategy is more common with residential and office buildings.
Fees are also in line with normal PE firms. They often charge management fees of about 2% of the fund. This fee will be used to pay for operating activities.
After an investment is liquidated, around 20% of the return will become carried interest. Most of them will go to the General Partners. The rest will be shared among partners, principals, VPs and associates.
80% of the return will be shared among Limited Partners according to their contributions.
1.2. Real estate private equity strategies
Real estate private equity firms utilize three main strategies: core, value-added and opportunistic. They all have distinct characteristics in the assets they invest, their portfolio, the required action, leverage and risk/return profile.
You can see everything in this comparison table:
|Targeted assets||Stable Assets||Renovation-needed assets||Redevelopment- needed assets|
|Portfolio||Diversified (i.e: office space, retail, multifamily units)||Diversified (i.e: office space, retail, multifamily units)||Badly managed and/or vacant properties|
|Actions||Buy-and-hold||Improvements, releasing or operational change maybe needed||Significant improvement are required|
|Leverage||Minimum leverage||More leverage than “core” strategy||Significant leverage|
|Risk/return profile||Low risk – low return. Annual returns are normally from 6-8%||Riskier than “core” but also higher returns, annual returns are from 8 – 10%||High risk – high return. Annual returns could be higher than 10%|
2. Real Estate Private Equity vs. Other Real Estate Investors
Other than REPE, there are also real estate investment trusts (REITs) and real estate operating companies (REOCs), raising funds and investing in properties. Some fundamental differences among the institutions are:
- REPE firms pool money from accredited investors to invest in properties, then renovate, operate, and resell them for profit
- REITs pool money from both retail and accredited investors. They dedicate a significant amount of their portfolio on commercial real estate and it’s common to develop and operate properties in the portfolio rather than reselling. Basically they are the mutual fund of real estate
- REOCs also invests in real estate but earnings will be reinvested in the portfolio, not distributed among shareholders
Here’s a deeper comparison so you can better understand the three:
|Investors||Accredited investors, i.e: pension funds, endowments and wealthy individuals||NMostly non-accredited retail investors||Mixed profile|
|Management strategy||Acquire, develop, operate and exit||Develop and operate properties. Cash flow is created via rent or leases Reselling is not the core business||Act like a management agency for acquired properties (i.e: charge monthly fee) REOCs have more flexibility than REITs to increase the asset value to resell.|
|Portfolio||Mainly commercial real estate||Both commercial and residential real estate||Both commercial and residential real estate|
|Type of company||Private Company||Public Company. REITs are publicly-traded||Public Company. REOCs are publicly-traded|
|Liquidity||Low liquidity because of long timespan, from 5-7 years||High liquidity||High liquidity, though not as much as REIT as REIT is more popular|
|Return sharing||Return is distributed among LPs||90% of net income is shared among shareholders. Only 10% is invested back into the properties.||Returns can be reinvested in current portfolio|
|Regulation||Don’t have to comply to as many regulations as REIT||Investment portfolio is tied with strict regulation: Min ¾ of assets must be in Real Estate Must have at least 100 non -accredited shareholders No more than 50% of REIT’s share can be owned by 5 or fewer shareholders||Don’t have to comply to as many regulations as REIT|
|Tax advantages||Carried interest creates tax advantages: As assets are held for >1 year, it is taxed as capital gain, which enjoys 0, 15% or 20% tax rate. (vs Normal income tax varies from 10% – 37%)||No corporate tax as 90% of net income must be passed on to shareholders.||No tax advantage|
You might hear real estate investment banking – an industry group within a large investment banking focusing on advising real estate-related deals. However, real estate private equity is rarely a group in a private equity firm. It is a segment or can be a separate entity, with their objectives including investing and renovating valuable properties and selling them at a premium. In terms of scales, REPE is much larger.
3. Real Estate Private Equity Career Path
In real estate private equity, you start as an analyst, then move up to associate after 3 years. Work for another 3 to 5 years and you become a vice president. Principal and general partner are the highest level, and usually require years of excellent performance. The hierarchy is simpler than a normal PE firm, with no senior associates.
Renovating a building and selling it in an arbitrage market is considered as easier than running and turning around a company for profit. That explains why REPE involves fewer employees than a normal private equity firm.
They mostly include two teams including the acquisition team and the asset management team. The acquisition team acquires assets through analyses and negotiation, while the asset management team manages the acquired assets. Sometimes staff works for both teams, but this is only common for junior levels such as analysts and associates. Asset management and acquisition teams also have two different progress tracks.
Pay wise, the acquisition role usually receives higher compensation, as firms think closing deals are harder than managing assets. But acquisition’s pay tends to be more volatile, because no deals means no money.
Asset management’s pay is far more stable, since firms always have assets to manage, even when deals are not closing.
If you want to know more about the hierarchy and career path of private equity, visit BankingPrep’s Private Equity article here.
4. How Much Do Real Estate Private Equity People Make?
An analyst at real estate private equity earns between $100K – $150K with no carried interest due to being the most junior position. That number for associates ranges from $150K to $250K, depending on firm size and personal performance, though carry is still unlikely. Vice presidents can make $300K – $500K annually, with some additional carry.
Principals earn between $450K-700K, with additional carried interest. Partners can make up to $1 million, with carried interest in the multiple of that number, or nothing at all. They earn so much carry because they put their own money into the investments.
REPE’s pay is highly variable among firms, and tends to be performance-based. Closing more deals and bringing more cash for the firm means you get paid more, and vice versa.
Here’s a table to sum up everything:
|Level||Salary range & Bonus||Promotion timeline|
|Analysts||$100K – $150K||2 – 3 years|
|Associates||$150K – $250K||2 – 3 years|
|VP||$300K – $500K||3 – 5 years|
|Principals||$450K – $700K||3 – 5 years|
|General Partners||$700K – $1M||N/A|
If you want to know more about private equity salary and how carry is distributed, visit BankingPrep’s article here
5. How to Get into Real Estate Private Equity
To get into REPE, you’ll need a bit of experience with real estate, since the industry is extremely niche, even within the PE spectrum. Therefore, past experience in real estate investment banking, or in real estate brokerage firms are highly appreciated.
You may ask, “I’ve been a successful house flipper, can I leverage that to get into REPE?”. It does help, but to be honest, not so much. House flipping does mean you deal with real estate, but doesn’t mean you handle huge assets. There are hundreds of millions at stake. Normal house flippers would never get their hands on that kind of money.
This question is like “I am a trader, can I work for hedge funds or proprietary trading firms?” The answer is always “not that easy”. Retail trading and house flipping are nothing like institutional trading and property development. You can leverage your experience, but don’t expect it to guarantee you an offer.
5.1. Common pathways to get into real estate private equity
Firms tend to recruit candidates with either “real estate” or “private equity” background. So, you can get into REPE by two ways:
- Real Estate Investment Banking: Just like normal investment banking into private equity, real estate bankers are also suitable for REPE thanks to their exposure to real estate and deal experience
- Real Estate Brokerage: RE brokers can also join REPE firms thanks to their on-field experience with properties
Other suitable backgrounds can be:
- Commercial real estate lending or real estate debt funds
- Acquisitions roles at REITs or REOCs.
- Property development roles (for asset management role)
- Post-MBA candidates with real estate-related pre-MBA experience
5.2. Real estate private equity recruiting process
REPE recruitment is less standardized and more need-based than normal PE. There’s no on-cycle and off-cycle stuff, so if you want to get into the industry, prepare for some hardcore networking and gain industry knowledge. You can do this by doing one of, but best, all of the following:
- Intern at a real-estate firm. It’s perfect to be in a real-estate investing company, though other real-estate organizations aren’t bad. This kind of experience gives you certain advantages compared to non-experienced candidates
- Join real estate organizations, or student societies. You can get some information about the industry, discuss the topic with like-minded people, and network, too!
- Learn industry-specific skills. RE are quite different from finance, so learning about concepts like tenant management, rent rolls, or real estate pro-forma will be helpful
As undergraduates, the most effective way is to network with alumni. If there are none, find professionals in REPE by connecting with them on LinkedIn, or cold-emailing.
Participating in industry associations or any school clubs will also help to connect you to people who are already in real estate.
As an MBA, you have to start networking as soon as you get accepted to your MBA program. Reach out to alumni first, then professionals who can give you insightful information.
The interview process includes multiple rounds and you will meet everyone in the firms across all levels. After getting through all of them, there will be a case study/modeling test.
And yes, the interview will be very “real estate-y”, with lots of industry-specific questions.
Still, questions can be grouped into four categories:
- Why real estate private equity?
- Why REPE but not PE/REITs/REOCs?
- Why us?
- How do you work in a team?
- What are the major companies in this industry?
- Which property will you invest in?
- What are the property’s growth drivers and risk factors?
- What is the property’s outlook in five/ten years?
- What is the firm’s current portfolio?
- Tell me about the firm’s previous strategies and exits
- What do you know about the firm’s investment thesis?
- What do you think about property X and how we can successfully exit?
- Short version: similar to the “paper LBO” in PE interview, which can last 30 or 60 minutes. In this test, you have to make several assumptions, calculate quickly, make recommendations and answer follow-up questions.
- 1-3 hours test: the test can be up to 3 hours. You have to input more detailed assumptions to calculate the final output.
Take-home test: it is the most complicated format. More time will be spent on market research so that you can back up your assumption in models. Solving cases involves 3-statement models with a focus on the revenue and expense drivers