Real Estate Investment Trusts (REITs) are popular investment vehicles that allow investors to own and profit from real estate assets without having to directly own or manage properties. One key distinction to be aware of when considering investing in REITs is the difference between public vs. private REITs.
Public REITs are those that are listed and traded on major stock exchanges, providing easy liquidity for investors who can buy and sell shares on the open market. On the other hand, private REITs are not listed on public stock exchanges and are typically not available to the general public.
When choosing between public and private REITs, investors should consider factors such as their risk tolerance, investment objectives, and time horizon. Both public and private REITs can play a valuable role in a diversified investment portfolio, offering opportunities to access the real estate market through different investment structures.
- What is a REIT?
- What is a Public REIT?
- What is a Private REIT?
- See All 10 Items
What is a REIT?
A REIT is a company that owns, operates and finances income-producing real estate. REITs can exist across a large variety of property sectors, ranging from residential to commercial real estate — including houses, condos, office buildings, parking lots, shopping malls and more.
REITs allow investors to indirectly reap returns on investment properties without having to actually buy, own, mortgage, operate and manage the property outright. Instead, these tasks are handled by the REIT, which typically owns and operates several types of properties all at once.
As an asset class, REITs can offer diversification, especially as a counterbalance to stocks, bonds and other investments. REITs are also renowned for delivering potentially higher returns coupled with lower risk. REITs generate returns for investors in 2 ways — through capital appreciation and rental income. These returns are transferred to investors in the form of dividends. REITs are required by law to distribute at least 90% of the income earned directly to investors.
What is a Public REIT?
When most people think of REITs, public REITs typically come to mind. These REITS are publicly owned, with shares traded on major exchanges. Anyone can opt into buying and selling shares of a public REIT. Because these companies are public, they must register with the U.S. Securities and Exchange Commission (SEC) and file regular reports.
What is a Private REIT?
Private REITs are not traded on major exchanges and are not subject to most SEC regulatory requirements. In order to buy shares of a private REIT, you must work directly with a qualifying broker and most require you to be an accredited investor. Accredited investors are individuals with a net worth of at least $1 million (not including a primary residence) or with an annual income exceeding $200,000 over the past 2 years ($300,000 with a spouse).
Because it is not publicly traded, a private REIT tends to be made up of illiquid investments, meaning the shares can’t be quickly exchanged for cash. Investors looking to buy shares in a private REIT must also meet the initial investment requirement, which is set by the company and can be as high as $100,000.
How Do These 2 REITs Differ?
The most significant difference between public and private REITs is access. Only accredited and institutional investors are able to invest in most private REITs. However, a growing number of real estate investment companies are creating private REITs through Regulation A+ offerings, making them available to non-accredited investors.
Because a private REIT is not registered with the SEC and not available to buy and sell on market exchanges, it is seen as more risky and illiquid. As a result, only individuals deemed to have greater knowledge and more capability of handling risk are allowed to invest in private REITs.
Private REITs typically have greater investment minimums than public REITs. It’s possible to buy shares of public REITs on market exchanges; however, private REITs have higher barriers of entry, reaching as much as $100,000 or more. Private REITs are also more illiquid than public REITs, with funds oftentimes being locked up for several years. Meanwhile, shares of public REITs can be bought and sold during normal market hours.
Private REITs don't have to register with and aren't regulated by the SEC. As a result, it can be challenging to find reliable performance data and financial information on some private REITs.
Who Should Invest in REITs?
REITs can be a solid option for investors looking to diversify their portfolios with real estate but don’t want to purchase and manage a rental property outright. REITs offer many of the same benefits as traditional investment properties but without many of the risks. With a REIT, you can invest in real estate without having to buy an entire property, take out a mortgage, hire a realtor, find a tenant and so on. Instead, investors can access many different rental properties through a REIT without bearing personal responsibility.
Who Benefits Most from a REIT?
Investors looking to gain dividend-based income and hedge against market risk could benefit from a REIT. Retirees, investors building a retirement portfolio and investors looking for diversification are also great candidates for REITs.
Pros of REIT Investments
- Dividend income: A REIT can be a great resource of steady dividend income. It is legally required to pay at least 90% of its taxable income to shareholders — oftentimes resulting in above-average dividend yields. REITs can have dividend yields of 5% or more, while the average stock on the S&P 500 yields less than 2%
- Rental income: REITs generate returns for investors through rental income and capital appreciation. Capital appreciation is the increase in property value over time. Capital appreciation combined with high dividends give REITs strong potential for excellent investment returns. Some REITs have even been able to outperform the S&P 500 over several years.
- Better value than stocks: Real estate also tends to hold better value than stocks during economic downturns and has little correlation to the stock market. REITs maintain many of these perks and can be a great way to bring balance to an investment portfolio.
Cons of REIT Investments
- Higher taxes: REIT dividends are typically taxed at a higher rate than most stock dividends.
- Sensitive to interest rate fluctuations: REITs can also be highly sensitive to interest rate fluctuations. When interest rates rise, REITs may see price decreases or profit slowdowns.
- Illiquid investment: Some REITs, especially private REITs, are notoriously illiquid. If you’re going to invest in a private REIT, be prepared to have your funds locked away for at least several months if not years.
What to Know About Investing in REITs
A REIT can offer solid returns and be a great tool for portfolio diversification. Nonetheless, it also comes with its own set of drawbacks that potential investors need to be aware of. If you’re still deciding between public vs. private REITs, know that the latter has limited options for non-accredited investors. Most members of the general public will have more investment options available with public REITs.
If you’re considering investing in REITs, make sure to follow through on your research and read over a REIT’s financials before making a decision. As always, come back to Benzinga for more investment tips, advice and educational content.
Frequently Asked Questions
Can a REIT be private?
What is the largest private REIT?
Why not invest in private REITs?
While traditional public REITs are easily accessible on the stock market, private REITs are not traded publicly and are more illiquid in nature. This lack of liquidity can be a significant downside for investors, as it may restrict their ability to access their funds when needed. Additionally, private REITs often have longer lock-up periods, meaning investors may be unable to withdraw their money for several years.