What is Private Equity in Real Estate?

Within the realm of multifamily real estate investing, there is a wide variety of opportunities for you as an investor, one of them being private equity. If implemented with due diligence it can be a lucrative way to increase your cash flow and expand your overall wealth. But what is private equity and how does it apply to real estate investing? Let’s find out!

What is Private Equity in Real Estate Investing?

Private equity are funds that provide value to investors who are seeking to earn better returns rather than public equity markets, like stocks. Real estate private equity (REPE) is an asset class made up of private investments in commercial real estate property. Rather than individual deals, private equity capital is raised through funds. Through this capital raising from outside investors, firms will:

Conduct Research: The real estate market will be researched with due diligence and will identify potential investment opportunities.

Underwrite Property Financials: The property financials will be reviewed, including expenses and potential return on investment (ROI).

Acquire and Develop: Once a property has been sourced and vetted through due diligence, it is time to acquire the property.

Enhance and Managed: The property will be managed through expertise to ensure it is well-maintained, improved, and generates cash flow.

Selling: Through careful research of the real estate market and when it is the right time, the property can be sold for a ROI.

Some funds are targeted at specific types of assets, whiles other are more flexible and invest in multiple assets. We believe the best category to invest in is commercial real estate: more specifically, in multifamily housing.

Benefits of Private Equity Investment in Multifamily Real Estate

If you are seeking to earn passive income, a private equity real estate firm, such as CF Capital, focuses on acquiring and operating multifamily assets that provide stable cash flow, capital appreciation, and a margin of safety. A private equity multifamily real estate partnership comes with several benefits:

Returns

The biggest benefit of investing in private equity real estate is the returns, specifically passive returns. Especially with multifamily private equity, your investments will increase over time, since it produces income in itself. Multifamily investing generates steady cash flow from rental income, potentially having higher returns in the future and providing diversification benefits. And like all real estate, multifamily investment generally should appreciate over time (and has historically done so), providing the investor with a long-term opportunity.

Tax Benefits

Income that is derived by multifamily investing is generally protected through depreciation, which provides investors with long-term benefits of substantial cash flow and little tax burden. Furthermore, any excess cash flow and appreciation that is not protected by depreciation is taxed at a lower rate than earned income. You’ll want to consult with your CPA on the wide-ranging tax benefits of investing in real estate private equity for your situation, but there are even more meaningful benefits beyond depreciation and lower tax rates that you may be able to take advantage of.

Low Volatility

Every investor's goal is to create the highest return with the least amount of volatility. When the markets are changing, investing in stocks and bonds can be nerve-wracking. Commerical real estate can reduce your portfolio’s overall volatility.

Managed By Experts

Now if you think about it, investing requires a lot of experience and professional care. You have to do research, analyze, acquire, improve, develop, manage, and enhance the property. This can be intimidating, especially if this is your first time. But what if an expert handle all of this for you? Real estate private equity provides this for you.

Why Private Equity in Multifamily Investment?

Multifamily properties play a vital role in the real estate sector and have consistently produced the highest average annual returns of any commercial real estate investment. Adding multifamily real estate to your investment portfolio increases returns, balances market uncertainty, offers tax advantages, and serves as a source of financial freedom. Today, as an accredited investor, you can partner with the highly experienced team at CF Capital to make equity investments in multifamily real estate. For more information, get in touch with CF Capital today.

Cap Rates and Interest Rates in Commercial Real Estate

Investing in commercial real estate requires forecasting current and future performance. This involves many variables, but for today’s discussion, we want to focus on two important metrics: cap rates and interest rates. As an investor, it’s imperative to pay close attention to the movements in these two metrics since they impact commercial real estate investment performance.

What is the Cap Rate?

Cap rate, also known as capitalization rate, is used in commercial real estate to determine the rate of return that is expected to be generated on an investment property, if purchased without leverage. It describes the relationship between a property’s Net Operating Income (NOI) and its market value. The formula used to calculate the cap rate is:

Net Operating Income = Total Income – Operating Expenses

Capitalization Rate = Net Operating Income / Purchase Price

Cap rate is a basic calculation for how real estate investments are valued in the marketplace. If there are lower cap rates, it generally means that the property is less risky, and the asset price is high. Conversely, the higher the cap rate, generally the greater the risk and potential return. Lower value cap rates typically indicate the property is steady and has reliable growth, a characteristic commonly seen in multifamily properties. Higher cap rates imply relatively lower prospects of return on property investment and are therefore considered riskier investments.

What are Interest Rates?

Interest rates are the amount charged by a lender to a borrower and can have a profound effect on the value of income from real estate investments. If interest rates are low, the bank will earn less on the loan issued and a borrower will pay less to obtain the loan. When rates are high, a bank earns more, and a borrower pays more. Higher interest payments reduce your net cash flow and investment returns, which is called the cost of financing.

When it comes to investing in commercial real estate, there is one type of interest rate benchmark that is important to track, risk-free rate. That is the rate paid on a bond issued by the U.S. Department of Treasury with a 10-year maturity. It is called the risk-free rate because it is considered the safest place to put money and investors can be confident that they will be repaid, with interest, on time. However, in comparison to investment returns on commercial real estate, the return on investment is low.

As an investor, how much more risk are you willing to take in order to capture higher returns? This is where the relationship between cap rates and interest rates comes into play.

The Relationship Between Cap Rates and Interest Rates

Commercial real estate cap rates and interest rates are historically highly correlated and understanding the relationship between the two can give you insights into the market. As interest rates go up and down, cap rates also go up and down. Both are not static, which means both are constantly changing, impacting real estate valuations. Economic conditions and investors' demand are factors that drive changes in the 10-Year Treasury rate. During economic setbacks, investors tend to lean toward the safe side and use Treasuries, which drives prices higher and rates lower.

Cap rate changes are driven by numerous factors, but the most prominent are supply and demand expectations. When there is a low supply and high demand, investors will accept a lower return because there is a lower risk. Cap rates fall and prices rise, meaning investors are willing to pay more for potential growth. So, depending on the economy, the spread between treasury rates and cap rates expands and contracts. When the spread is at a high, it means the potential return may be higher, but if it is a lower spread then it is a lower return.

Invest with CF Capital Today

The relationship between interest rates and commercial real estate can significantly impact property values. That’s why it’s important to strategically monitor changes in interest rates and how it might impact the market. At CF Capital we carefully research and due diligence, to find investment opportunities that offer the potential for high returns even in today’s current market. When you passively invest alongside our team, you can have confidence we are closely monitoring and optimizing these factors for your real estate investment success.

From the Desk of CF Capital: November 2022 Investor Report

Dear Friends and Investors,

We hope you're doing well and having a wonderful beginning to your November. Our CF Capital family has settled into our new Downtown Louisville Office, our families had an eventful Halloween, and we've been productive on the asset management and acquisitions fronts. Tyler shared a Halloween Horror Story on the highly acclaimed "Real Estate Guys Radio" Program, and you won't want to miss it. (Listen to the podcast on Apple Podcast or on Spotify.

As of October, upon returning from the phenomenal New Orleans Investment Conference, we finally settled into our new space on Main Street in Downtown Louisville! We'd love to host you the next time you're in town, whether you're in to enjoy the world-famous bourbon trail, check out a world-class horse race, or get onsite to some of our collectively owned properties in the area. We're always welcoming you with open arms to come say hello, and have enjoyed hosting several investors over the recent months.

On the business front, we've been investing heavily into the execution of our investment business plans at our current communities via detailed asset management, working with our on-site and regional teams in an effort to exceed our property goals for the quarter and for the year. On the renovation side, we're currently investing over $7mm in capital expenditures across our portfolio - in amenity enhancements, unit renovations, and exterior improvements. This past month, we repaved and re-striped two of our most recent acquisitions' parking lots, overhauled the landscaping and installed new on-site signage. Our rehab teams are busy renovating dozens of units each month, and our leasing teams are busy securing qualified residents at premium rental rates. We're focusing on driving occupancy, revenue and optimizing net operating income (NOI).

On the acquisitions side, we're very active in the market making a healthy amount of offers on deals; we're seeing some more attractive opportunities than we have in the past few years. The recent market turmoil is starting to shake loose more compelling deals, and we're anticipating our next opportunity for you to invest with us to be coming soon. While the cost of debt has substantially risen in recent months, the resulting market dynamics are more compelling than we've seen in a long time; it's now just a matter of putting the Rubik’s Cube of the capital stack together in a manner that allows us to amplify returns, protect capital, and optimize our investments. As you know, we remain picky, patient and prudent, and when we secure an acquisition, it's passed the rigorous standards that we have set. Stay tuned, and we hope to be announcing the next new deal soon.

In Partnership,

Tyler & Bryan

P.S. There's no higher compliment than you referring us to your friends, family, and colleagues. We'd be honored by the opportunity to become a part of their trusted networks. Share your experience investing with CF Capital & invite others to become an investor here.

Is Commercial Real Estate Really a Good Hedge Against Inflation?

Many experts are predicting inflation will continue to grow higher and higher. While there is uncertainty about the broader economy, it is important to apply sound economic strategies during this time and for the long haul. This has led investors like you to ask: is real estate really a good hedge against inflation? In this blog, the CF Capital team investigates this question through the lens of commercial real estate.

How Does Investing in Commercial Real Estate Hedge Against Inflation?

Inflation is one of the most significant risk factors for those looking to invest their hard-earned capital. However, commercial real estate is considered a safe haven against that insidious and sometimes invisible force. Here’s why:

The cost of rent rises generally at the same rate as inflation. As currency devalues, average property values increase with commercial real estate—new or old—as lease renewal rates rise. Multifamily real estate, in particular, resets rent annually per resident and is generally a sounder hedge against inflation versus other asset classes in commercial real estate as a result.

Inflation will typically increase the cost of the rent. When the rent increases, the investor’s income will increase. The higher income possibilities lead to higher sale value when selling real estate (assuming your income growth exceeds expense growth). Commercial real estate is a quality inflation hedge because of its intrinsic properties making it a compelling investment during inflation periods when prices rise rapidly.

Benefits of Investing in Commercial Real Estate

Commercial real estate can be a highly profitable investment vehicle. On top of that, it’s also considered exceptionally reliable regardless of market cycles since it has little correlation with stocks and bonds. Of course, all real estate is hyper-local, but generally, there are many inflation-hedging benefits to investing in commercial real estate. Investing in it is not only about generating cash flow, but also building on your own wealth over time via appreciation and tax mitigation. Here’s how:

Ensures streams of cash flow
Equity appreciation through NOI enhancements
Allows you to utilize powerful leverage
Cash flow is taxed at a lower rate than earned income
Appreciation is taxed at capital gains rates, a significant savings versus earned income
Improvements can be depreciated, generating powerful “paper losses” for investors

Selecting the Best Property Type

Here comes the question: which type of commercial property will work in the current economy and as things continue to unfold in the broader market? It depends on the specifics and your goals in particular. At the current state of the economy, investors are leading toward the safe haven of multifamily real estate. Of course, CF Capital specializes in apartment investing. Multifamily real estate has grown in popularity over the past few years because it can offer a secure and more reliable investment where there are multiple sources of cash flow coming from different tenants, and everyone needs a place to live (in a strong or weak economy). That means there will always be income, as long as the operator can meet the market.

The market can seem unpredictable. When it comes to commercial real estate investing, including multifamily investing, it is always good to monitor the economic situation and plan out your strategy carefully. If you are interested in passively investing in quality multifamily real estate, sign up for our investor list.