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Investing in Private REITs vs. Public REITs

Real estate investment trusts (REITs) can either be open to the public or only available via private placement.

Real estate investment trusts (REITs) are a popular choice for investors looking to add real estate exposure to their portfolios without the hassle of owning physical properties. These entities pool money from investors to buy and manage real estate, and return a portion of the profits to those shareholders. However, it’s important to distinguish private REITs from public REITs. Each option comes with its own set of advantages and disadvantages, and understanding these differences is crucial in making an informed investment choice. As you compare private REITs vs. public REITs, consider speaking with a financial advisor about which option might be more appropriate for you. 

What Is a Public REIT?

Public REITs are traded on national stock exchanges, making them widely accessible to individual investors. They fall under the regulatory oversight of the Securities and Exchange Commission (SEC), which requires regular disclosure of detailed financial information. This regulation bolsters the security of investing in public REITs, making them a potentially more secure option. 

According to Nareit, an organization that represents REITs and real estate companies, there are over 225 publicly traded REITs in the U.S. with a combined market capitalization of $1 trillion.

There are more than 225 REITs in the U.S. registered with the SEC that trade on one of the major stock exchanges—the majority on the NYSE. These REITs have a combined equity market capitalization of more than $1 trillion.

Examples of public REITs include the Simon Property Group, which owns dining, shopping and entertainment properties around the world, as well as Public Storage, which acquires and manages self-storage facilities.

Pros of Investing in a Public REIT

Public REITs are traded on stock exchanges, providing investors with liquidity that traditional real estate investments, as well as private REITs, lack. You can buy and sell REIT shares with ease, allowing you to react swiftly to changing market conditions.

REITs are also required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. This means investors can potentially enjoy a steady stream of income, typically higher than what many other stocks offer. It’s a reliable source of passive income, making it especially appealing for retirees and income-focused investors.

Cons of Investing in a Public REIT

Like stocks, public REITs can be subject to market fluctuations, causing short-term losses. Investors need to be aware of the volatility public REITs can be susceptible to and understand how market conditions and economic circumstances may impact the dividends they offer. 

Meanwhile, REIT dividends are taxed as ordinary income, which can result in a higher tax rate for some investors compared to long-term capital gains. Investors should be aware of management fees and expenses that can reduce overall returns.

Rising interest rates can also negatively impact REITs, as they may increase borrowing costs and reduce the attractiveness of dividend yields. 

What Is a Private REIT?

REITs invest in a range of properties, including apartment complexes like this one.

Private REITs are investment entities not listed on national securities exchanges, generally offered to accredited and institutional investors through private placements. Examples include Broadstone Net Lease, Inc., and Starwood Capital Group’s Starwood REIT, both of which have left significant imprints on the real estate sector.

However, the lesser regulation tied to private REITs brings with it increased risks. While private REITs do have the potential to offer higher returns due to their agility in making investment decisions, it’s important to note that these higher returns aren’t guaranteed.

It’s also important to note the distinction between private REITs and non-traded REITs. While neither are traded on stock exchanges, the latter are still open to the public and fall under the purview of the SEC. 

Pros of Investing in a Private REIT

Potential advantages of investing in private REITs include the possibility of higher returns and greater stability. Since private REITs aren’t subject to the same level of regulatory oversight and reporting requirements as public REITs, they may have more flexibility in their investment strategies. Their ability to invest in non-traditional, less competitive properties can open opportunities for capitalizing on market inefficiencies. However, remember that these higher returns are not guaranteed – just possible.

There are also unique tax advantages associated with investing in private REITs. Since they’re structured as pass-through entities, REITs do not pay federal income tax at the corporate level. Instead, income and deductions flow to the individual investors. This can lead to potentially lower overall tax liability. 

Cons of Investing in a Private REIT

On the flip side, private REITs typically have longer holding periods, which means your money may be tied up for an extended period. Additionally, they may lack the liquidity of publicly traded REITs, making it more challenging to sell your investment if needed.

Moreover, private REITs are generally riskier investments compared to their publicly traded counterparts. They also may lack the same level of transparency, making it harder for investors to assess the underlying assets and the performance of the REIT.

Keep in mind that private REITs are only available to accredited and institutional investors, so they aren’t for the average retail investor hoping to invest a small amount. They also often require higher minimum investments, which can range up to $25,000, according to Nareit.  

Types of Investments in Public and Private REITs

Both private and public REITs can make large-scale investments in a myriad of real estate properties. For instance, they may manage extensive portfolios of office buildings, shopping centers, apartment complexes or warehouses. They can also invest in niche sectors, including data centers, cell towers and timberlands, providing ample opportunities for diversification with their unique risks and rewards.

When to Invest in a Private vs. Public REIT

Choosing between a private or public REIT largely depends on one’s personal financial conditions and goals. Public REITs are the more common choice for individual investors. They are suitable for those who want to buy and sell REIT shares like stocks, and they often offer higher dividend yields due to their larger investor base.

On the other hand, private REITs may be better suited for affluent investors who are willing to lock in their investment for a longer-term commitment. These often require a larger initial investment and are suitable for those seeking a more hands-off, long-term approach to real estate investment.

Types of REITs

A homebuyer looks at an online listing for a property that's owned by a real estate investment trust.

There’s also a range of public and private REITs, each with their unique characteristics and complexities. Here’s a look at four common variations you may encounter as an investor:

Equity REITs

Equity REITs, the most prevalent REIT category, specialize in acquiring and owning real estate assets that regularly generate income. These encompass a wide range of properties, including residential complexes, shopping centers and commercial space, office buildings and entertainment venues. Investors in equity REITs reap rewards in the form of dividends derived from the rental income these properties produce.

Mortgage REITs

Mortgage REITs, as the name implies, focus their investments on mortgages and mortgage-backed securities. Their income streams come from interest collected on the loans they hold or from the acquisition of mortgage-backed securities. While mortgage REITs can offer potentially higher yields, they are susceptible to fluctuations in interest rates and credit risk. For instance, Annaly Capital Management and Starwood Property Trust serve as notable examples within the mortgage REIT sector.

Hybrid REITs

Hybrid REITs blend attributes of both equity and mortgage REITs. As a result, a hybrid REIT may own physical properties and invest in debt. This diversification can help mitigate some of the risks associated with the two main types.

Specialized REITs

Some REITs focus on specific sectors, such as healthcare, data centers or infrastructure. These specialized REITs allow investors to target niche markets and potentially benefit from industry-specific trends.

Bottom Line

Understanding the intricate differences between private and public REITs, along with their unique advantages and disadvantages, is paramount when contemplating indirect real estate investing. While they both expose investors to real estate investments, public REITs are traded like stocks on public exchanges. Private REITs, on the other hand, are only open to accredited and institutional investors through private placements.

REIT Investment Tips

  • A financial advisor can help you select investments that align with your financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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