Quick Take: Private real estate investment funds—whether equity or credit-based—offer compelling options for high-net-worth individuals aiming to diversify, preserve wealth and generate long-term returns. Yet many investors hesitate due to misconceptions or incomplete information about how they work or what to expect. Below, we’ll address the most frequent concerns and offer guidance for evaluating private real estate funds confidently.
Do Private Real Estate Funds Have High Barriers to Entry?
It’s common to view the high minimum investments—often $100,000 or more—as an exclusionary tactic. For an investor with a $3 million net worth, that’s more than 3% in one commitment.
Under SEC Regulation D, only accredited investors—those with specific income or net worth levels—can invest in private funds. These regulations recognize that private markets are complex and illiquid, requiring a higher level of financial sophistication than, say, investing in the stock of a publicly held company. While the SEC reviews these thresholds, evidenced by a recent no-action letter issued in March, high barriers remain standard.
What Do Liquidity Restrictions Mean for Investors?
The lack of liquidity in private funds is a major deterrent. Unlike public stocks or real estate investment trust (REIT) investments, these funds require long holding periods—often five to 10 years. That’s not a flaw; it’s a feature.
Private real estate funds that focus on growth invest in physical assets that need time to improve and sell. If investors could withdraw at will, managers wouldn’t be able to execute long-term strategies. That’s why it’s important for investors to understand a fund’s strategy (closed-end versus open-end) so that investors can properly gage expectations. Major players like Blackstone and Starwood have faced liquidity pressure in the past few years, reinforcing the fact that this risk is very real.
Bottom line: Before investing, ask yourself: Can I truly part with this capital for several years? If the answer is no, private funds may not be suitable.
What Kind of Reporting Should I Expect from a Private Fund?
Private funds don’t operate under the same disclosure requirements as public companies, which can raise concerns about the openness and clarity of fund communications. However, reputable managers provide key reporting tools:
NAV updates: Most reputable funds provide monthly or quarterly updates on net asset values (NAVs), giving investors a snapshot of the fund’s current value.
Asset-level reports: Investors should expect periodic reports that break down performance at the property or asset level, not just at the fund level. This allows a clearer understanding of what’s driving returns and risks.
Annual audits: Independent annual audits are a key sign of a fund’s commitment to financial integrity. These audits provide an extra layer of assurance that reported figures are accurate.
Performance letters: Many funds issue quarterly or semi-annual letters outlining recent performance, changes in strategy, and market outlook.
Investors don’t have the same level of visibility into private real estate funds as they do with public investments, which have different reporting standards. But they can still conduct thorough due diligence including requesting historical performance, evaluating communication frequency, and asking other questions. Read more on how to conduct due diligence: 5 Steps to Take When Conducting Due Diligence in Commercial Real Estate
What’s the Difference Between Partnership Taxation and REIT Taxation?
Tax reporting can intimidate investors unfamiliar with private fund structures. Most private real estate funds are taxed as partnerships, which differ significantly from funds structured as REITs, which are taxed as corporations.
Though K-1s and multi-state filings can add hassle and cost, many investors find the potential tax benefits of partnerships worth the tradeoff.
What Risks Should I Consider Before Investing in a Private Real Estate Fund?
All investments carry risk. And private real estate funds come with their own set of uncertainties. For investors, the main types of risk to consider are:
Market risk—the impact of broader economic cycles, interest rates and real estate market trends.
Manager risk—the skill, experience and decision-making of the fund manager.
Asset-specific risk—issues related to individual properties, such as location, tenant quality or unexpected expenses.
Liquidity risk—the inability for investors to access capital quickly, especially during market stress or fund-specific events.
What Questions Should I Ask a Fund Manager Before Investing?
Given the current market environment—marked by global volatility, shifting interest rates, and geopolitical uncertainty—it’s more important than ever to ask the right questions before committing capital. Investors should ask managers these three questions as they evaluate opportunities:
- What is your process for managing liquidity and handling redemption requests, especially during periods of market stress?
- How do you assess and mitigate risks at both the property and portfolio levels? Can you provide examples from past market cycles?
- What are the expected exit strategies for the fund’s assets, and what factors could delay or accelerate those exits?
While a strong manager’s track record is reassuring, it’s important to remember that past performance is not a guarantee of future results. Even the best managers can face unforeseen challenges, and market conditions can change rapidly.
Making Private Real Estate Part of Your Portfolio
Private real estate funds can be a valuable part of a high-net-worth portfolio, offering diversification, potential tax benefits, and long-term growth. But they also come with tradeoffs—limited liquidity, complex tax reporting, and greater due diligence requirements.
By understanding these challenges and asking the right questions, investors can more confidently assess whether private real estate aligns with their goals and risk tolerance.
