If you’re considering adding commercial real estate (CRE) to your portfolio and have chosen to invest through private placements, the following four steps can help guide your decisions:

Step 1: Define Your Investment Objectives: Pursuing current income or capital gains? Decide whether you are seeking to generate income or capital gains from your CRE investment.  This decision will help you focus on specific tranches of the capital stack and various real estate classifications.

Step 2: Research and Analysis: Dive Into Options

Explore classifications like core, core+, value-add, and others, while assessing the varying risk levels each represents. Stay informed on relevant news and industry trends to gauge your chosen sectors’ growth potential and associated risks. Be sure to analyze the supply and demand trends, including whether the project is in a supply constrained market with multiple demand drivers.   Are the projected rent or hotel room rates in line with their competing projects?

Equity options like preferred, participating preferred, convertible, or common may suit moderate to aggressive risk-takers.  For higher risk and potential rewards, categories like value-add, distressed, or opportunistic are options best suited for experienced investors or those investing via a qualified sponsor.

Step 3: Security Selection: Assess Your Risk Appetite

Based on your objectives, decide whether debt or equity investments align with your risk tolerance. If you’re looking for current income with lower risk, debt investments (such as convertible, subordinated, or mezzanine) and Core or Core+ strategies are solid options. As noted in Investors Beware – Assessing CRE Risk-Return (link), risks vary by investment type, so choose wisely.

Step 4: Due Diligence: Dig In or Seek Guidance

If you lack the time or expertise for thorough due diligence on the sponsor and project, consider partnering with an experienced investment bank. Their experience can provide confidence in your investment decisions by thoroughly evaluating key aspects.

Incorporating commercial real estate into your portfolio through private placements can be rewarding, but success depends on aligning your investments with your financial goals and risk tolerance. By following these four steps—defining your objectives, conducting thorough research, selecting a suitable security type, and performing robust due diligence—you can confidently navigate the complexities of CRE investments.  Whether you aim for income or higher growth potential, tailoring your approach to your unique profile will help you make informed decisions and potentially enhance your investment outcomes.

For more information, please visit Carofin’s website.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

All real estate investments can potentially lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.

Real estate investments are speculative and generally illiquid. They are suitable only for investors who do not anticipate a need for liquidity or can afford to lose their entire investment.

The actual amount and timing of distributions paid is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of capital. These programs can give no assurance that they will be able to pay or maintain distributions, or that distributions will increase over time.

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