Considering investing in a private equity CRE fund
Hi group, I see the posting rules prohibit newbie career advice -- this is similar but not career advice so please let me know if it isn't appropriate.

I'm middle aged and have been investing in the broad market since I was a teenager with a little bit of tinkering in options in my 20s. Mostly just endurance investing. I may have an opportunity to invest in a promising private equity fund that deals entirely in CRE and given their supposed track record, it would be silly to pass up the opportunity. I meet the criteria for clientship at the firm and the minimum is about what you'd expect from such a venture, an amount I am willing to put up.

Assuming the group is trustworthy (I'm doing DD on that separately), what should I know as a financial investor (as opposed to a literal RE partner)? Their properties are all within about 100mi of my location and they are mostly owned with low/no leverage (I'm going to find this out this week). The strategy seems to be: acquire with low/no leverage, collect rent over 5-7 years paying dividends along the way, exit at a profit and return to investors. Lather, rinse, repeat. 

Beyond the general outlook of CRE, interest rates, etc, what are the key pieces of knowledge I should have before investing? What might my blind spots be?
[{"id": "ixmbp82", "text": "CRE market has done incredibly well over the last 15 years so a lot of funds would look great (relatively speaking for a low octane unleveled CRE strat) doing a similar strategy. \n\nWith rates this high &amp; prices declining accordingly it's not a terrible time if you have a lot of cash to put to work to go unlevered. That said an unlevered CRE property returns (for what sounds like not a value add strategy) aren't going to be particularly impressive and historically may look better due to general CRE value growth that isn't guaranteed to occur in the future.", "replies": [{"id": "ixmdyuo", "text": "Thanks. I definitely thought about the past performance and possible, relative cooling over the next decade. That said, how much upside do I price in given that they're unleveraged and thus immune themselves to interest rates. They aren't immune to the market effects of rising rates but they aren't paying them directly. Should I be more worried about the overall effects and not get too excited about the ability to buy with cash?", "replies": [{"id": "ixmhml2", "text": "Just so i understand, this is a fund you'd be investing in not an individual property?  I just ask because we have invested in 4 \"syndicated\" projects, where we decide on a project by project basis if we want to go in.  That way we can vet for ourselves how we feel about each one.  There are many companies across the US who organize these types of investments.\n\nThe nice thing with those is they have a huge info packet so you can understand what they're hoping to achieve, see what kind of debt they're using, etc.  Generally speaking a successful project will return 6-9% monthly cash flow during the hold period, and then achieve a total IRR in the high teens upon sale at a higher value.  (However deprecation recapture tax at the end can eat significantly into the total profits.)\n\nIs what you're buying into going to function like a dividend stock, where you will receive yearly dividends?  Or monthly?  Anyway what you're describing is also a common form of real estate investment.  It's a great idea for diversification.  IMO there will be lots of good buying opportunities in the coming 6-24 months so it's a good time to invest in this sort of thing.\n\nI'd just make sure you understand all the tax ramifications.  Our syndicated deals have been great but i didn't understand the tax situation on sale.  Would be better to know all up front.", "replies": [{"id": "ixmj1an", "text": "This is a great reply, thank you. Yes, it's a portfolio or properties and I do not believe we (investors) would be deciding on the properties but that's a great question to bring up when I meet with them next week. 6-9% monthly cash flow sounds high and amazing but I don't see how that would pan out without a lot of leverage. \n\nBut yes, this (for me) is an opportunity to tap into an experienced team, broadly diversified, over the medium/long term. \n\nThe logistics as to how the periodic funds pay out is something I will learn soon. I'll look into the syndication strategy; I'm not familiar with that term but it sounds more or less like what they do.", "replies": [{"id": "ixmpibp", "text": "Sounds like they have a really solid safe strategy.  And yes, the syndicated projects I've been in are all using max debt and max depreciation acceleration to achieve those returns.\n\nThat being said, when the property value goes up a lot, the leverage makes a huge difference.  We are in one project, a huge apartment complex, which has gone very well.  We are under contract to sell for roughly 80% more than we paid in 2017.  Because of leverage, the investors will receive about 3.5x what we put in.\n\nThere are two websites where people vet various syndicated investments.  506 Investor Group and Private Investor Club.  To be honest I've been happy with the company we've invested with, but those two websites have users who (as a group) have invested in hundreds of alternative real estate structures.  They do very detailed analysis.  Sometimes syndicators will offer improved terms to members of those group because there's the potential to get a few million bucks investment from group members in one shot.\n\nAnyway theres a whole world of this type of investments.  It's hard to learn about or find good info.  Sounds like a solid group you're considering investing with.  The best advice I've gotten is it's better to invest $50k into 10 different projects than $500k into one.  The big winners will more than offset the 1-2 mediocre performers.  Good luck!", "replies": [{"id": "ixmqtmk", "text": "Thanks for this, lots to think about. Happy Thanksgiving!", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "ixmilf7", "text": "Rising interest rates will impact future value as you should assume future buyers will be borrowing money. With this model most of your profit comes from the sale in 5-7 years and if cap rates go up a couple of points that could wipe out your profit completely. I\u2019d also look at how long they have been in business. Did they successfully navigate 2008? The vast majority of these types of businesses have been making great returns because you would be stupid not to with increasing property values and very low interest rates.", "replies": [], "depth": 3}], "depth": 2}, {"id": "ixmtydr", "text": "Also want to comment that, even though your fund will be unlevered, the exit value of your properties will very much be affected by the interest rate environment when you go to exit. When the fed slashed rates to 0% we saw a brief rise in the value of real estate because you could achieve the same returns to equity at a much higher price due to how favorable debt terms were. The market hasn't fully reset yet in my opinion but it's coming. But the flip side is that the need for real estate is durable. In underwriting deals I would base your exit on what the next buyer could pay solving for the debt environment. I.e. what are the deal level equity returns of 2021 sales comps given 75% LTV at 3% and then how far downwards do you have to adjust the price to solve for those same returns at 50-60% LTV at 7%. It's going to be an unpleasant surprise which is why a lot of people are calling COVID-era debt \"golden handcuffs\" - especially with rent growth those properties are cash flowing like crazy but because returns are so dependent on your exit price, it's very possible we see a multi-year hangover in transaction activity. With the 2008 crash, debt was expensive enough to force the hands of tons of people. But we don't have that same problem this go-round. \n\nThat being said, if you're investing in single family you've got a much deeper buyer pool which means you're more liquid and price discovery (and recovery) in the event of a crash will be faster. So maybe I'm just too bearish on valuations. At any rate I would spend at least a little time understanding your downside in the event it's a great company but the market turns on you.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ixmfsbg", "text": "What product type do they deal with? What market? \n\nI\u2019d be weary to purchase anything for the next 6-12 months unless it is a screaming deal. IMO if the fed have to take inflation back to 2%, there is going to be a lot of heart ache along the way. Included in that heart ache is CRE value. If the property drops in value more than anticipated, the 5-7 years exit strategy may not work. \n\nIn terms of investing in a fund, I\u2019d make sure they are trustworthy and I\u2019d want to see the history of success over what period and make a judgement on that. \n\nWhy don\u2019t you do your own deal?", "replies": [{"id": "ixmgyml", "text": "&gt; What product type do they deal with? What market?\n\nStrip malls w/anchor and senior living / rehab. Central FL market. \n\n&gt; Why don\u2019t you do your own deal?\n\nWell, I had been considering acquiring residential RE throughout my 30s (tri/quad) but got cold feet due to the fact that I wasn't sure I wanted to manage properties or outsource that part. Also at the time we were starting a family, busy job, etc. \n\nIn terms of commercial RE, I don't know enough to invest directly nor and I willing to put up high 6 figures at that risk level. An experienced RE group brings to the table experience and a lot more capital to amortize across. \n\nNot sure if that's good reasoning but it's where I am currently. \n\nAs to the \"why now\", I've met one of the people involved through a completely unrelated social group and I'm kind of looking at this as an opportunity to get involved in something not widely available -- this seems to be where a lot of money is made (maybe I'm wrong?). It's also worth mentioning that they aren't prospecting me or trying to hard sell me at all. I just happened to learn about their business and got intrigued.", "replies": [{"id": "ixn82ol", "text": "Couple thoughts I haven't seen mentioned yet: \nYour asset class of strip retail is high cap rate due to risk of many retailer bankruptcies with the expected downturn and may see your payout cut with a bunch of tenant bankruptcies in the expected recession of 2023. Senior housing can mean a mix of things. Is it age restricted apartments or assisted living. Both were hit hard with high vacancy due to more Covid deaths of seniors and have been slow to increase occupancy since older people do not want to risk going into an assisted living \"prison\" that was very restrictive with visits and tenants leaving for a day for over a year until vaccines were distributed. The fund manager might be too optimistic on their leasing plans.\n\nNo or very low leverage raises a red flag for me. The only areas I think that are good return on equity with no leverage are value add properties with little to no occupancy that will be renovated, leased up and sold or financed with a high leverage loan to get some equity cash out. Typically REITs are 50%+ LTV with loans so your fund likely will underperform these REITs due to lower leverage.\n\nThese funds are enticing you with lower bond like yields, but you are using equity funds. You might want to look into high yield bond funds for higher yields, or look at REITs with better return on equity, but lower dividend payments. I personally prefer REITs because investing in private funds typically has 5-7 year lock up period that I don't like. For that time frame I would rather be the general partner running the real estate investment fund since I am an experienced real estate investor.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ixmq2sc", "text": "Make sure no adjustable rate mortgages \n\nNo front running, and if front running   Thar you know what they acquired it for and it\u2019s disclosed. \n\nThat all distributions are waterfall vs excess investor money. \n\nNo asterisks on investor reports that says *not reflective of asset performance \n\nAsk if managing partner has actually put in the capital on their end up front like the other investors. \n\nAsk about the acquisition fee offsets. Ask about the disposition fee off set. \n\nHave fun.", "replies": [], "depth": 1}, {"id": "ixn4tw6", "text": "Every private equity group I know is having trouble finding decent deals to put their money in. It\u2019s a difficult time. If you choose to go forward, make absolutely sure this is only a small portion of your assets and be prepared to not see much back from your capital for up to a decade.", "replies": [{"id": "ixn5vl6", "text": "Yep, \\~5% to start. And since you mention it, it's probably worth looking at other parts of my portfolio that may indirectly have RE holdings just to ensure I'm not over exposed there.", "replies": [{"id": "ixnci6o", "text": "What is that number? $200k or $1,000,000?\n\nI would not be passively investing in senior living. It\u2019s a solution waiting for a problem\u2026", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ixn550a", "text": "Management is key..just remember if you insist on having the best in class managers, with large portfolios and track records, they typically share less and have large numbers of satisfied investors. They can raise money easily and have no problem cutting off PITA investors.\n\nUp and comer groups may not have the grey hair experience but will typically create opportunities where they share more.  They have a bit harder time raising capital so the splits or cash returns are many times more favorable...but there's more risk on the experience side. \n\nFind a balance if you are looking to maximize returns with up and comer groups that look promising..if you are looking to just park money, go with the more experienced and proven firms with the lower returns/higher fees..debt funds are good for this.\n\nSecondarily, I'd still follow Buffet's rule and understand what you are owning by investing in a CRE fund. If multifamily, understand the leases, what motivates tenants etc..same with Self Storage, NNN QSR funds, industrial, office etc..they all have different lease types, caoital requirements and structures, selling to different end users (tenants) and different cash flow types all of which will affect your returns..Don't just take the manager/sponsors expertise as the end all and accept their marketing propaganda as the ultimate truth. Get knowledge for yourself.\n\nGood luck on your journey!! Perhaps your success here will help you eventually break out into principal CRE investing.", "replies": [{"id": "ixn674t", "text": "They're pretty transparent about their niche and what they hold. I wouldn't call these folks absolute veterans but best I can tell they have a smaller number of larger investors. I will inquire about how the returns are distributed and what the split looks like for an investor/LP.\n\nThanks for the advice!", "replies": [{"id": "ixn71xs", "text": "Cool..Sounds like a blind pool which has its downsides but should be fine especially if they have a other funds that are mature or closed out and they stay within the funds mandated asset class. Someone mentioned syndications which is also a good way to diversify into different opportunities and managers that you can vet deal-by-deal.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ixnqjdf", "text": "When you say track record are you comparing those returns to other funds and investments in the same industry?  Or to other asset classes? \n\nBecause in this world going to zero is a possibility while others it's not.  A good return has been 15% per year for the last decade but going forward with these interest rates it's not going to be like that even for top performers.\n\nIf your not getting in by way of a personal friend or family member who works there and your not in this industry I would say it's not worth the risk.  Don't invest more then you are willing to lose or go without for 7+ years.\n\nThings to look out for - phantom income although more likely you will have the opposite from depreciation.  Also exposure to capital calls if spaces go vacant.  Those can be significant.", "replies": [{"id": "ixnr316", "text": "I'm not sure how to get the records of other PE funds in the same class. They seem a bit opaque from the outside. How would I compare?", "replies": [{"id": "ixocasu", "text": "Generally REPE firms compete with each other for investor dollars. My own included. \n\nBut to answer your question, investing in private markets is a great way to preserve and generate wealth. I\u2019m not going to give ANY investment advice here. But my firm\u2019s general strategy has been to stay away from equity investments because we don\u2019t (no one does) really know how long this inflationary market will take to fully shake out. \n\nWe\u2019ve been focusing on short term debt funds. Get a nice rate that beats inflation, and also get your money back with short investment periods. So when we return the money, it\u2019ll be in a market with more clarity on future direction and our clients can decide to jump into our equity funds at that moment. \n\nAnyways. Let me know if you want to know more between debt vs equity right now.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ixp3f36", "text": "Which fund manager?\n\nWhat fund?\n\nWhat is their AUM?\n\nHow much in total have the invested in the past?\n\nWhat is their track record?\n\nHave you met who runs their investment decisions?\n\nAre they concentrated geographically?\n\nAre they concentrated in specific property types?\n\nWhat is their investment period?  What is their hold period?  What is their disposition period?  What extension options do they have for their hold/disposition period?\n\nDo you contribute your entire investment upfront?  Can they call capital?\n\nWhat asset management fee do they take?\n\nWhat acquisition fee do they take?\n\nWhat disposition fee do they take?\n\nWhat refinancing fee do they take?\n\nWho makes up the other investors in the fund?  Are the key personnel of the management major investors in the fund?\n\nAt the deal level, do they partner with other companies?  Does this fund take the GP or LP position typically?\n\nWhat type of debt do they utilize?", "replies": [], "depth": 1}, {"id": "ixpg7iy", "text": "Do they offer a preferred return hurdle to the LPs?  Along with your DD on their track record and such you would want a LP-paid-first hurdle which is normally presented as a preferred return, then there is the split or waterfalls.  \n\nAlso, do they self manage and self rep on leases for the retail properties?  If they do, look at their fees on that and make sure the fees are industry standard and that they have decent experience doing both mgmt and leasing if so. \n\nIn general, high leverage with low rates has been the juice that made many firms look like geniuses with huge returns for the last several years on projects they were able to exit. Now that same high leverage will create very serious risk for the LP capital if they have debt that is maturing or variable rate and they have to refi or sell in a rising/higher rate environment.  \n\nAlso the grade of tenants matter a lot in retail as mom and pop operators in smaller strip centers tend to have more risk of going out of business, which would be somewhat mitigated by low/no leverage IMO. Class of property matters in assisted living too, along with regulatory compliance and liability. \n\nI personally like the no/low leverage approach as it creates less risk of going to zero for the LP capital generally speaking.  Full disclosure I run a small fund the last four years using zero leverage so obviously I would agree with that approach. But we invest in different asset classes than this fund you describe here.", "replies": [{"id": "ixq8b3b", "text": "I had some of this noted to discuss but the way you laid it out is very helpful. Thanks!!", "replies": [], "depth": 2}], "depth": 1}]