Private REIT vs. Public REIT Investing

REIT INvesting strategies

Ambitious investors have long turned to REIT investing as it is historically known to be a powerful, high-yield investment strategy.

For individuals looking to diversify their portfolios, REITs offer exposure to commercial real estate, portfolio diversification, and dividend earnings. Modeled after mutual funds, REITs function by pooling capital from numerous investors, making it possible for individual investors to earn dividends from real estate investments, all without having to buy, manage, or finance any properties themselves.

As with any large investment, investors should weigh the pros and cons while considering how they would like to see returns from their investment. In the case of REIT investing, investors must choose whether to invest in a private or public REIT.

Read on to better understand the value of REIT investing.

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What is a Private REIT?

Private REITs are real estate funds or companies that do not trade shares on the national stock exchange and therefore are exempt from SEC registration. For this reason, they can only be sold to institutional or accredited investors. Typically, private REITs must be bought through a financial advisor at a brokerage. Investors should check with a financial advisor to see if they qualify as an accredited investor. Keep reading to learn  the characteristics of private REITs and compare the investment methods of public and private REITs.
public vs private reit

What is a Public REIT?

There are two types of public REITs:

1. Publicly registered and non-traded

2. Publicly registered and publicly traded

 

Publicly registered and non-traded REITs are called public non-listed REITs. This means they are registered with the SEC but do not trade on the national stock exchange.

Publicly registered and publicly traded REITs mean the REIT is registered with the SEC and publicly traded on the national stock exchange. These REITs are marked by high liquidity because they can be sold or traded at any time.

Pros and Cons of Private REIT Investing

As with any alternative investment, REITs have both advantages and disadvantages. Both private and public REITs have the opportunity to offer great portfolio diversification, competitive total returns, and the opportunity for attainable entry into the real estate investing world. There are also downsides worth considering as well.

Below are the advantages and disadvantages of Private REIT Investing:

 

1. Diversification- private REITs are a great way to diversify and lower the risk of your overall portfolio without the volatility of stocks.

2. Reduced volatility- REITs are a great way to diversify and lower your overall portfolio risk. Private REITs experience low volatility because they are not subject to public market fluctuations.

3. Liquidity- private REITs are not liquid as they cannot be easily sold or traded since they are not publicly traded on the national stock exchange.

4. Fund management/company risk- private REITs are subject to market risk. How executives of a private REIT chose to run the company or fund can be subjective

5. Availability of Information / Transparency- private REITs lack transparency as they are not required to register with the SEC.

6. Investor selection- investors looking to purchase private REITs must do so through a financial investor or brokerage because they are not publicly traded on the national stock exchange.

7. Minimum investment- private REITs remove acquisition barriers and the headaches of property ownership and management by offering a tangible way for individuals to invest in commercial real estate.

8. Returns & Dividend Payments- private REITs will appreciate at the rate of the real estate market. If you purchase a private REIT for $100,000, it is worth that at purchase and can grow or decrease from there.

9. Tax Advantages- private REITs have positive tax advantages. Investors experience tax savings advantages from depreciation and long-term capital gains.

10. Leverage- private REITs are typically low leveraged because they traditionally borrow from banks.

Pros and Cons of Public REIT investing

Public REITs, like private REITs, have both pros and cons to consider. While they share many similarities, there are a few key differences to note between public and private REITs.

 

1. Diversification- public REITs offer diversification and lower risk for your overall portfolio.

2. Reduced volatility- because public REITs are on the public market, they can be affected by the volatility of the market and the swing of human emotions buying and selling.

3. Liquidity- Unlike typical real estate investments, which are not easily liquified, public REITs offer liquidity events over time. Public REIT investors also avoid broker’s commissions typically present in selling traditional real estate investments.

4. Fund management/company risk- while public REITs are subject to market risk, public REITs are protected from most fraud risks because they are regulated by the SEC and they are publicly traded on the national stock exchange.

5. Availability of Information / Transparency- due to SEC regulatory reporting requirements, public REITs are highly transparent

6. Investor selection- investors looking to purchase public REITs can buy and sell shares on the national stock exchange with a minimum investment of one share at the current share offering price.   

7. Minimum investment- public REITs remove acquisition barriers and the headaches of property ownership and management by offering a low barrier to entry for individuals looking to invest in commercial real estate.

8. Returns & Dividend Payments- Dividend yields tend to be lucrative due to a requirement that 90% of their taxable income is paid to shareholders. REITs are historically known for high dividend payouts.

9. Tax Advantages– dividends on public REITs are taxed as ordinary income, so there is no tax break for investors investing in public REITs.

10. Leverage- public REITs can be characterized as highly leveraged. They can leverage debt from sources such as hedge funds and other non-bank sources.

Summary of REIT Investing Considerations

REIT investing can be a wise strategy for investors looking to diversify their portfolios through real estate investing. Investing in a REIT means an individual is investing in an entire portfolio of income-producing real estate. As always, it’s essential to perform proper due diligence on the investment and consider all pros and cons when assessing the viability of a REIT investment.

A solid investment strategy, REITs do come with associated risks. Like many investments, the risk is often a trade-off for the notable upside REITs can offer. While the risks are always worth considering, REITs offer significant portfolio diversification, competitive total returns, and the opportunity for attainable entry into real estate investing.

To learn more about REIT investments, read our in-depth guide on REIT Investing.

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Disclaimer: The information provided above is for general informational purposes only.  It should not be considered a recommendation or personalized professional, legal, tax, or advisory advice.  Its accuracy or completeness cannot be guaranteed and may change due to changes in regulations, legal, or economic conditions. Please consult with your legal or tax advisor on your individual tax situation.

All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.