Alternative Real Estate Investments

A Beginner’s Guide On How Private Equity Splits Work in Commercial Real Estate Investing

When you invest in real estate, your return depends on the level of risk you take. Some properties are very safe and steady. Others can grow faster but come with more uncertainty. My goal is to help you understand how these choices work so you can feel confident in the path you choose—whether you prefer active or passive investing.

Why Risk Matters

Every investor has options. You could put your money into real estate, stocks, bonds, or even metals like gold. Each choice has its own level of risk and reward. So when you look at a real estate deal, it’s important to compare its risk to the other places you could invest. This helps you decide if the return makes sense for you.

Different Types of Real Estate Deals

Just like there are safe “blue chip” stocks and riskier “penny stocks,” real estate deals fall into groups:

• Core (Low Risk):
  These are high-quality buildings in good areas with great tenants. They are steady and reliable but don’t grow as fast.

• Value-Add (Medium Risk):
  These properties need some work—better leasing, repairs, or updates. They can pay off well if the improvements go as planned.

• Opportunistic (Higher Risk):
  These often involve major renovations or building something new. The rewards can be high, but so can the risk.

• Land or Development (Highest Risk):
  These can produce big gains but are the most unpredictable.
  

Part of my role is to help you understand where each opportunity sits on this scale so you can make the choice that fits your comfort level.

How Profit Splits Work

In many real estate partnerships, investors buy different types of shares:

• Preferred Shares get a fixed return first (often 5%–12%).

• Common Shares get the extra profits after the preferred return is paid.

Some investors choose preferred shares because they want more safety. Others take common shares because they want more upside. Sometimes investors ask for a different profit split—like 70/30 or 80/20—if the project has more risk. This is normal, and each structure is designed to match the investor’s needs.

What Affects Risk and Return?

To help you understand how we evaluate opportunities, here are the main things we look at—explained simply:

1. Type of Property
   Safe buildings make steady money. Projects that need lots of work can make more but are riskier.

2. Location
   Big, stable cities are usually safer. Smaller or fast-growing markets may offer higher returns but also more uncertainty.

3. Strategy
   Is the plan to hold the building long-term, fix it up, or build something new? Bigger plans usually mean bigger risks.

4. Leverage (Borrowing)
   Using more debt can increase returns, but it can also magnify losses.

5. Market Conditions
   Things like interest rates, job growth, and supply and demand affect how safe or risky a deal is.

6. Tenant Strength
   Strong, long-term tenants make a property more stable. Short-term or unproven tenants add risk.

7. How Easy It Is to Sell (Liquidity)
   Some investments can be sold quickly. Others, especially private real estate deals, take time.

8. Sponsor/Manager Quality
   A skilled team lowers risk and often delivers better results. Experience matters.

9. Exit Plan
   A clear and realistic plan—like selling or refinancing—helps protect your investment.

Understanding the Three Main Levels of Risk

Here is a simple way to think about how private equity real estate investments are ranked:

1. Low Risk, Low Reward
   Strong buildings in strong locations with good tenants and low debt.

2. Medium Risk, Medium Reward
   Properties that need some upgrades or sit in smaller markets.

3. High Risk, High Reward
   Development projects, distressed buildings, or new markets.

Choosing the Right Fit for You

There is no “one right answer.” Every investor has different goals, timelines, and comfort levels. My job is to help you understand the trade-offs so you can pick the option that fits your needs best.

If you want steady income, we focus on safer properties.
If you want growth, we explore higher-reward opportunities.

Together, we look at the risks and returns so you can make a clear, informed decision that supports your long-term goals.