Real estate investing can be very capital intensive. Unlike stocks or bonds, where investors can get started with a small amount of capital and accumulative a portfolio over time, real estate investment requires certain amount upfront to get going and a high rate of commitment to grow overtime. This is where the value of having a real estate capital partner come into being, where the capital partner can kick start and accelerate the portfolio grow.
Real estate capital partners are most useful in real estate joint ventures where they partner with an operator. Similar to real estate private equity funds (REPE Fund) where there is a general partner and limited partner. In a joint venture scenario, the operator will the general partner, and the real estate capital partner is the passive party.
Related: see our How to Invest with 1000 dollars in real estate as an alternative option.
Matchmaking Between A Real Estate Operator and A Capital Partner
A real estate capital partner, as the name suggests, can bring capital to the deal. There are several reasons why they would be open to investing through a real estate joint venture.
- They don’t have the expertise in the market or asset class. For example, the operator is a developer and focus on office development in New York or condos in Flordia. Having an operating partner from the capital’s perspective means it can create the best breed portfolio via allocating capital to several operators specialize in an every.
- This approach also recognizes that someone good at the commercial office is not necessarily skilled in operating a multi-family building. This is a classic case of opportunity cost as a partnership strategy is a much more efficient capital allocation and time management process than building the skillset or expertise from the ground up. The capital or sponsor can focus on other areas where it can create the most value.
- The operator is best in class with an established track record and the capital partner can tap into the operator’s deal pipeline. This way, they can scale their investment quickly and effectively, which is very applicable in the current low interest environment where there is a darth of investment opportunities at high returns and private equity dry powder is at a record.
The benefit for the operator can be seen primarily through.
- A capital partner can help accelerate the business’s growth as with the same amount of capital can support more projects. The operator can expand into multiple projects that were not possible before
- They can kick off projects where it is simply not feasible with the operator’s capital by themselves.
- The operator can earn fees for managing the projects as it will be responsible for the day-to-day execution of the investment’s business plan and management. Another way of looking at this is by creating a more capital-light balance sheet in which the operator can earn an income from a lower capital base.
- Industry recognition of their ability as having the right partner with a strong reputation or pedigree means that the operator can generate value and be recognized for its skill in the sector. This can create a long-term value for the business especially coupled with a proven track record in delivering projects. We can’t emphasize enough the combination of a track record with multiple well regarded real estate capital partner can multiply and accelerate to long term value creation.
- Balance of expertise as the operator could especially skilled at execution but not great a capital raising, so the real estate capital partner takes care of the capital component.
- Reduce or diversify risk in the real estate portfolio. Instead of all of the eggs being in one basket, a sell down to a capital partner could make sense from a risk management perspective. This could also be a take out option on completion, and the arrangement could work for both parties as the ease of execution with a known party could offset a lower price and vice versa.
- Maintain control. As the operator brings the skills, they will have most of the control in the joint venture. A JV scenario does mean losing some of the control, but there could be compromises in the relative degree of oversight and always help to have another set of eyes.
- Learning how capital operates. By having a capital partner, an operator can have a first-row seat in seeing how different types of real estate capital, whether they are endowments, sovereign wealth funds, real estate private equity or family office, approach real estate investing. Having numerous partners and getting various perspectives adds to the operator’s knowledge and expertise of the landscape. Eventually, if they were to look to raise capital themselves, knowing the landscape can shortcut many lessons and pains than those that are not aware of the options available.
In sum, there are many benefits and trade-offs for real estate operators to have a real estate capital partner. As with any deal, the right balance between the two depends on individual circumstances.