Private Placement Investments In Real Estate

A private placement is an investment offering in which investors engage in a deal provided by a sponsor. It’s a means for raising capital without creating a public offering and is commonly used by startups and real estate syndicators.  Depending on the type of offering, investments can be made by accredited and non-accredited investors whose funds are pooled to participate in a specific project.

Although the phrase "private placement" can refer to a range of investments, it’s commonly used in real estate acquisitions to purchase multifamily, office, retail, mobile home parks, self-storage or other type of assets.

There are a couple of ways to look at this. To begin, you are investing alongside the team of sponsors when you invest in a private placement. This team is responsible for managing the asset that is purchased and will ultimately determine whether or not the investment is successful. In the hands of an inexperienced sponsor team, the investment carries greater risk.  It’s critical to work with a sponsor team that has in-depth experience in the asset that is being acquired to lower your risk. Second, private placements are exactly what they sound like: private. The deal presented is not available to the public; only investors that have a relationship or connections to the sponsor team will have access to the deal.

Individual investors can participate in larger deals through private placements. An investor may be able to put $50,000 or $100,000 into a private placement, whereas funding an entire $4 million deal is out of their league. The sponsor raises the funds through a private placement, allowing several individual investors to benefit from the rewards that a larger deal can bring. Furthermore, without having to become an expert, the investor can diversify into numerous areas, product types and marketplaces. You rely on the sponsor team as the experts in their field to manage the asset.

As long as a private placement complies with all applicable state and federal rules, the sponsor and investors can be as creative as they want. A private placement can be structured in a variety of ways to maximize the value of the transaction for all parties involved.

These are terms that are often used when describing and discussing a private placement. Many of these terms are interchangeable between other types of investments, but it’s important to understand what it means when pertaining to private placement in real estate.

Sponsor: Also known as a syndicator or general partner. This is the team responsible for putting together the investment.

Investment Summary: This document can take on various names, but it essentially serves the same purpose; to provide potential investors detailed information about the deal. It describes the participants, the agreement, the projected returns, the market and overall financial analysis. The investment summary should provide investors enough information to make an informed decision about the offering and whether it meets their investment objectives.

Private Placement Memorandum: This lengthy, legal document contains details about the placement, outlines the risks of investing in it and other information as required by federal securities legislation. It's crucial to read and comprehend this document once you’ve decided you want to proceed with participating in a private placement.

Accredited Investor:  Defined as an experienced or savvy investor, these individuals must meet a set of criteria set forth by the government to be considered for higher risk placements.  Some private placements will require that the investor’s accreditation be verified by a third party such as a qualified Certified Public Accountant. To be considered accredited investors you must meet at least one of the following criteria:

•    Net worth of exceeding million dollars, excluding the value of their primary residence.

•    Annual income of at least $200,000 per year for the past two years and expect to earn the same amount this year. If a spouse is included, the total rises to $300,000 per year.

Non-Accredited Investor: Also known as a sophisticated investor, these are typically considered less savvy due to limited investment experience.  Because the investment is most likely a larger part of their income and/or net worth, non-accredited investors are a higher-risk of financial loss in the event the investment fails to meet projected returns.

Conclusion

A direct investment into a real estate asset is known as a private placement. These offerings are managed by an experienced sponsor team and offered to passive investors that only provide capital to the deal; they don’t have any responsibility for running the project.  Private placements are available on many different types of investments, from real estate to business startups and more, giving investors access to deals that help them diversify their portfolios beyond traditional stock and bond investing.

Investors seeking private placement opportunities need to get to know sponsor teams with experience in managing these offerings.  Because a certain level of financial education and sophistication is required, these offerings are not open to the general public.  Sponsors offering private placements can be found by joining local or virtual real estate networking groups, investing and business masterminds. 

To learn about the types of private placements we specialize in schedule a call today or fill out our investor form and a we will contact you with more information.