Public vs. Private REITs: Which is the Better Buy?

By: , Contributor

Published on: Jan 07, 2020

While investing in private REITs has some advantages, it's not for everyone.

There are three main types of real estate investment trusts (REITs):

  • Publicly traded
  • Public non-traded
  • Private.

Most real estate investors are likely quite familiar with publicly-traded REITs, which investors can buy and sell freely on stock market exchanges like the Nasdaq and New York Stock Exchange. Investors, however, are likely less familiar with non-trade REITs, whether public or private, because they're not as visible or easily accessible. That's especially true with private REITs, which are only open to accredited investors -- a designation reserved for those who meet certain income or net worth thresholds.

While there are some notable benefits to investing in private REITs, several major drawbacks make public REITs stand out as the better choice for real estate investors looking to buy.

The differences between public and private REITs

The main thing that sets public REITs, both traded and non-traded, apart from private ones is access. Anyone with enough capital to invest (usually less than $1,000) can buy shares of a public REIT. They can do that through a brokerage account if it's traded on an exchange. Meanwhile, if it's non-traded, they can buy shares directly from the REIT's management company -- such as through a real estate crowdfunding platform -- or through a third-party broker-dealer.

Private REITs, on the other hand, are only available to accredited investors, which are those who meet one of two criteria:

  • They earned at least $200,000 annually in each of the last two years.
  • They have a net worth of more than $1 million, excluding their primary residence.

Further, an investor needs to be able to meet the private REIT's initial investment requirement, which will vary by company and can be as high as $100,000. On top of that, most private REITs don't offer redemption programs. As such, they can lock up an investor's capital for several years. Finally, a private placement sold through a third-party broker often comes with high commission costs, which can be as much as 15% of the investment.

Another major difference between public and private REITs is that all public ones must register with the Securities and Exchange Commission (SEC). As such, these REITs must file regular reports. Private ones, on the other hand, don't have to register and, therefore, aren't regulated by the SEC. While this lack of regulatory oversight reduces operating costs, which can help bolster returns, it increases the risk for individual investors who could unwittingly fall prey to a REIT scam. That's why the SEC requires that private REITs only accept accredited investors.

Why consider a private REIT?

While private REITs have their share of drawbacks compared to public ones, there are several notable benefits. First, as with non-traded REITs, stock market volatility doesn't impact the share price of private REITs. That allows investors to reduce the overall volatility of their portfolio by diversifying it outside of the stock market.

Another major advantage of private REITs is that the long-term holding period enables the management team to implement a long-term strategy instead of managing the company to meet the short-term expectations of Wall Street. This approach can help private REITs produce higher total returns over the long run.

Finally, since private REITs aren't required to register with the SEC, they have lower compliance costs. This factor enables many private REITs to pay higher dividends than public ones.

Why public REITs stand out as the better buy

Private REITs offer real estate investors the potential to earn higher returns. But in exchange, investors are taking on more risk due to the lack of regulatory oversight. This increased risk is why only accredited investors can buy shares of a private REIT.

Since the majority of investors don't meet these criteria, public REITs are their only option. Further, while accredited investors will find that some high-quality private REITs exist, there are plenty of excellent public REITs to buy. Because of that, they're better off saving the time required to do their due diligence on a private REIT -- as well as the added commission costs -- and focus on buying high-quality public REITs instead.

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