Private REIT vs Public REIT: What’s the Difference?

Real estate is one of the largest sources of equity, both in the United States and elsewhere around the world. The real estate market, as a whole, is worth trillions of dollars.

And because the supply of real property is structurally limited, these properties continue to increase in value over time. In many cases, investing in real estate may even be more lucrative than investing in the S&P 500, or other indexes that reflect the general state of the stock market.

What is a Real Estate Investment Trust?

One of the most popular ways to invest in real estate is through an organization known as a Real Estate Investment Trust (REIT). REITs provide an investment structure similar to mutual funds, but for real estate assets. They allow you to invest in different types of real estate without having to actually buy or manage any properties yourself.

REITs are diverse and can be classified based on:

• Accessibility: Publicly traded, non-traded public, or private
• Investment method: Equity or debt
• Asset types: Apartments, single family homes, data centers, self-storage, offices, etc.
• Investment strategy: Core, value-add, or opportunistic

All Real Estate Investment Trusts will fall into one of two distinct categories: public REITs and private REITs. In this comprehensive guide, we will discuss how each of these types of REITs is structured, their various benefits and drawbacks, as well as other important factors to consider when becoming a real estate investor.

What is a (Public) REIT?

A Public REIT—as the name might suggest—is a REIT that can be invested in by the general public. In most cases, when someone uses the term “REIT” without a specific qualifier, they are referring to public REITs.

Currently, it is estimated that publicly traded REITs compose about 70% of all equity in the broader REIT marketplace, collectively valued around $2 trillion. Publicly traded REITs closely resemble stocks. 

To become an investor, all that an individual needs to do is purchase one or multiple shares, which they can hold onto for however long they want (assuming the REIT is continuously operating). As a result, public REITs are generally considered the easiest way to become a real estate investor.

Like stocks, publicly traded REITs are closely monitored and regulated by the Securities and Exchange Commission (SEC). One of the most important regulations for publicly traded REITs is that at least 90% of all income must be paid to shareholders via dividends. Many publicly traded REITs pay out even more. 

Related: Get Personalized Advice from a Financial Advisor in Your Area

What is a Private REIT?

Private REITs are notably different from public REITs. They are not bought and sold like their public counterparts and, instead, are usually structured as a limited partnership. Collectively, private REITs are worth about $1 trillion, which is about one-third of the broader REIT market. 

Investing in a private REIT is a much bigger commitment than investing in their publicly traded alternatives. While these organizations still face a few important regulations, each REIT is generally allowed to create its own terms for investors. These terms can include:

·   Minimum Initial Investments: private REITs are not ideal for people who only want to invest a few hundred dollars. Many private REITs will have a minimum investment requirement that is tens of thousands of dollars, or even more.

·   Minimum Income Requirements: most private REITs also typically prefer their partners to be accredited investors, meaning that their before-tax household income is more than $200,000 or their net worth is more than $1 million (investors will need to present documents verifying their accreditation).

·   Minimum Investment Horizon: most REITs will have a required “lock-out” period where all capital will be kept within the organization and its properties. Usually, this commitment will be at least a few years.

Private REITs are allowed to market themselves in various ways, such as suggesting an expected return on investment and describing their general investment philosophies.

However, these organizations are not allowed to guarantee any specific returns, which is why it is so important for anyone who is considering investing in a private REIT to carefully do their research before making any lasting commitments.

Related: Buy and Hold Real Estate - Ultimate Investor Guide

Who is Allowed to Invest in REITs?

Publicly traded REITs can be invested in by any member of the general public. There are many different ways to invest in publicly traded REITs—usually any online brokerage platform or institution that allows you to trade or invest in the stock market will also allow you to invest in publicly traded REITs.

Private REITs are much more exclusive. As suggested, the REIT itself gets to dictate the terms for investing, such as requiring all partners to be accredited investors. And even if someone is an accredited investor, private REITs still reserve the right to reject a particular partner for various reasons, as long as they are not violating any anti-discrimination laws.

Benefits and Drawbacks of Investing in Public REITs

The most obvious benefit of investing in a publicly traded REIT is that—compared to most other real estate investment opportunities—investing in one is incredibly easy. As long as you have access to a funded account, investors can open and close their positions in real time.

Additionally, investors can control the exact size of their position (there are publicly traded REITs available for less than $1 per share, which is theoretically all you would need to open a position). If you decide that the REIT you choose is not right for you, you can choose to sell whenever you want—however, this might affect if and when you will receive any applicable dividend payments.

The legally required dividend payments make these investments particularly appealing to dividend-seeking investors. However, if the income generated by the REIT is limited (or even negative), then investors might find themselves disappointed with their net ROI.

One notable drawback of publicly traded REITs is that value of a given REIT is relatively volatile. This can be managed by diversifying and investing in multiple different REITs at once but if there is a major event that affects the entire real estate market—such as the Fed raising interest rates or the 2008 financial crisis—then you can expect all REITs to decrease in value at once.

Still, public REITs are a feasible option for individuals looking to gain from the equity growth and income generation yielded by the real estate industry as a whole.

Related: Get Matched with a Financial Advisor Near You

Benefits and Drawbacks of Investing in Private REITs

One of the biggest appeals of investing in private REITs is that these trusts are relatively predictable. The REIT should have a clearly detailed payout structure, making it possible for investors to anticipate how much money they will receive and when they will receive it (assuming there are not any major financial issues).

By being limited to accredited investors, private REITs are more exclusive, which is appealing to some people interested in a stable investment. However, the ways in which these REITs are structured can also create some challenges. For example, even high-net-worth individuals might be hesitant to make a multi-year commitment, which is why liquidity is frequently cited as a primary concern when investing in private REITs.

Additionally, it is important for investors to note that not all private REITs are created equal. These trusts require prospective investors to do a considerable amount of research, which is not something that all investors want to do. Looking at both the REIT’s and its managers’ historic track record, evaluating the investment plan, and examining the state of the real estate market as a whole can help investors make better decisions. 

Related: Retirement Planning - The Definitive Guide

The Bottom Line: Private REIT vs Public REIT?

Whether investing in a particular REIT makes sense for your investment portfolio will depend on several important factors, including your personal investment goals, your level of risk tolerance, your ability to access the market, and more.

In general, publicly traded Real Estate Investment Trusts are ideal for individuals who are hoping to find assets that closely resemble stocks, as well as those who are looking to make smaller, more flexible investments.

Private REITs are ideal for those who have considerably more capital to work with and are willing to make a larger commitment for an investment that produces predictable payments.

Private and public REITs are passive options for adding residential or commercial real estate investments to your portfolio. In both cases, it is crucial for investors to do their research and weigh all relevant risks and benefits.