Quick take: When investing in private real estate, don’t focus solely on fees. They are easily quantifiable and often used for comparisons, but overemphasis can leave investors vulnerable to costly traps, such as excessive upfront charges or commissions. Effective managers often deliver significantly better returns, making them worth the cost. Evaluate managers using factors such as track record, expertise and risk mitigation processes.
Fees are an essential consideration in any investment, but in private real estate, an excessive focus on fees can lead investors to miss the bigger picture—value. Price is what you pay; value is what you receive. Focusing too heavily on fees when evaluating private real estate investments can result in adverse selection and suboptimal performance.
Private real estate is labor-intensive, yet its fees are often compared to those of advisors, index funds and mutual funds. These are vastly different models. Managing physical real estate requires a tremendous amount of personnel. That’s neither good nor bad; it’s just different.
The Difference Between Fees and Value
Fees are easily quantifiable, which is likely why so many investors focus on them. Since all managers charge fees, it’s easy to compare them across different firms. However, value is more complex and requires a deeper evaluation of factors such as manager expertise, investment strategy, team quality, reputation and risk management. The right manager can generate significantly higher net returns over time, making an even slightly higher fee structure a worthwhile tradeoff. Finding both lower fees and higher value is the best of both worlds. Ultimately, what matters most is the return the manager produces after fees.
The True Cost of Excessive Fee Sensitivity
In public markets, where most investments are commoditized, minimizing fees is a rational approach. Passive investing through indexes has been proven to outperform active managers over the long run. However, the difference in returns might only be 50 to 150 basis points per year. This adds up over time, but it is not the difference between making and losing money.
Private real estate is different. Data indicates that the performance disparity between top-quartile and bottom-quartile private real estate fund managers can be substantial. A study analyzing 6,000 private funds—including real estate—from 1980 to 2022 found significant dispersion in absolute performance among managers. The top 5% of real estate managers produced a 2.18x multiple, while the bottom 5% suffered a 45% loss.
Source: Dimensional Fund Advisors LP
This differential in returns highlights how top managers deliver significantly greater value. They know how to grow wealth across cycles by exercising discipline and adhering to prudent risk management standards. Choosing a manager with slightly lower fees but a significantly weaker track record in generating risk-adjusted returns can lead to long-term wealth erosion—and potentially sleepless nights. Sometimes, “low-cost” is simply a hook to attract customers. At Origin, we say there’s nothing more expensive than cheap management. Great talent produces far more value than it costs.
The compounding effect of superior management is profound. For example, a $1 million investment that generates an 8% compounded annual return over 10 years would be worth $2.16 million, while that same investment compounded at 12% would be worth $3.1 million. That’s nearly a 100% difference in profitability. Over time, these seemingly insignificant gains translate into significantly higher wealth creation.
When Do Fees Matter?
That said, fees should not be ignored, as they can serve as a red flag at the extremes. Some firms still charge fee loads exceeding 10%, which should be a warning sign for investors. We see this frequently in the 1031 exchange space, where investors, facing time constraints, must quickly find a replacement property. It’s not uncommon for various fees in these transactions to exceed 15%, destroying wealth on day one and making success improbable. A large part of the upfront load can be attributed to commissions paid to advisors who “sell” the product to their customers. At Origin, we avoid these upfront fees through our direct-to-consumer model and by working with registered investment advisors who get paid by their clients, not by commissions.
Private Equity Fees, Explained
What are reasonable fees? Knowing the market rate for fees allows investors to ask smarter questions about how a fund is managed before committing capital.
Every manager charges fees, but there is no single rule of thumb for any specific line item. Fees should be evaluated in aggregate to determine whether a manager is being paid a reasonable amount for the value they provide, or if the structure creates a “heads they win, tails you lose” scenario.
In real estate, there should be a balance between management fees that keep the business running and performance-based fees that reward strong results. Investors might prefer all fees to be paid at the back end, but how would managers attract and retain top talent if they had no revenue? Additionally, if an investment starts underperforming, what incentive does the manager have to continue dedicating time to it if they aren’t going to get paid?
That said, investors shouldn’t ignore fees as they can serve as a red flag at the extremes.
On the other hand, if a manager receives their fees regardless of performance, that’s unfair to investors and a red flag. Fees should align interests and be fair to both parties.
Common Fees
Below are some of the most common fees in real estate syndications and funds, along with their general ranges:
Committed capital fee: Common in fund structures, this annual fee is based on the amount of equity an investor commits. Average range: 1% to 1.75% of committed equity.
Fund management fee: Replaces the committed capital fee once capital is invested. Covers firm overhead, fund management and sourcing new investments. Average range: 1% to 1.75% of invested equity.
Set-up and organizational fee: A one-time charge covering legal, marketing and administrative costs. Average range: 0.5% to 2.0% of total equity.
Operating expense fee: More of an expense than a fee, these cover third-party costs such as audits, accounting and software. Average range: 0.2% to 0.7% per year on invested equity.
Acquisition fee: Common among syndicators, this fee is quoted as a percentage of the total deal size. Average range: 0.5% to 2.0%, depending on deal size and other fees.
Performance fees: Entitles the manager to 10% to 20% of profits, typically subject to a preferred return hurdle (usually 7% to 10% annually). These tiers define how profits are split once investors reach a certain IRR or equity multiple.
Commissions: These fees are generally paid to advisors and can range from 3% to as much as 8%. Advisors deserve to be paid, but it is in the investors’ best interest to have commissions paid out over time rather than upfront. It’s better to have 98 cents of every dollar go into the investment versus 90 cents.
How to Evaluate Value Beyond Fees
Investors need a structured approach to assessing managers. Key factors to consider include:
Track record: How has the manager performed over multiple market cycles? How do they create value at the asset level?
Quality of the team: Does the firm have experienced professionals with a deep understanding of real estate markets and operations?
Risk management: How does the manager mitigate downside risk while maximizing upside potential? How much leverage do they use?
Alignment with investors: Is the manager personally invested in the fund? Are incentives structured to reward long-term performance rather than short-term gains?
Investment strategy: Does the strategy align with the investor’s goals, and does the manager have a proven ability to execute it effectively?
Next Steps
Fees should never be ignored, but they should not be the sole determinant of an investment decision. In private real estate, selecting the right manager is the most important consideration, and fees should be only a small part of that equation. Investors should take a comprehensive approach to due diligence, prioritizing expertise, strategy and alignment over cost alone.
Ironically, low fees can end up being quite expensive. Don’t dismiss a manager simply because their fees seem high at face value—dig deeper to determine true value.
If you’re interested in learning more about evaluating private real estate investments and how Origin Investments delivers long-term value, schedule a call with our investor relations team.
