How Private Real Estate Investing Works

Private real estate investing means putting capital into a property or portfolio that is not traded on an exchange. Instead of buying shares of a listed REIT, you invest alongside a sponsor who acquires, operates and eventually sells the asset.

The capital stack

Every deal has a hierarchy of claims. Senior debt gets paid first, then mezzanine debt, then preferred equity, then common equity. Your position in that stack determines both your downside protection and your upside.

• Senior debt: lowest risk, fixed return, paid first

• Preferred equity: fixed preferred return before common equity participates

• Common equity: last paid, unlimited upside

Fees and the waterfall

Sponsors typically charge acquisition fees, asset management fees and a promote — a share of profits above a hurdle rate. A common structure pays investors an 8% preferred return, then splits remaining profits 70/30.

Model returns net of every fee layer. A 15% gross IRR can become a 10% net IRR quickly.

Liquidity and horizon

Assume your capital is locked for the full stated hold, often three to ten years. Redemption programs, where they exist, can be suspended exactly when investors most want out.