A real estate investment trust (REIT) can be a solid investment and sound way to diversify an existing portfolio. A REIT is esteemed for its competitive returns, steady dividend income and long-term capital appreciation.
If you’re looking to get involved with REITs, you’re probably wondering whether public vs. private REITs are a better fit for you. While these types of REITs have some factors in common, each is ultimately designed for different kinds of investors.
Use this guide as a starting point to deciding whether to invest in public vs. private REITs — or both.
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 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 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 and Cons of REIT Investments
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%
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.
Real estate also tends to hold value better 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.
Unfortunately, a REIT can come with its own set of drawbacks. For starters, REIT dividends are typically taxed at a higher rate than most stock dividends. REITs can also be highly sensitive to interest rate fluctuations. When interest rates rise, REITs may see price decreases or profit slowdowns. Finally, 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.
Benzinga Best REITs
At Benzinga, we’ve done the research on the best REITs on the market so you don’t have to. Take a look at these top candidates.
DiversyFund Growth REIT
DiversyFund offers one of the few private REITs available to non-accredited investors. With a minimum investment of only $500, investors can buy shares of a growing portfolio of value-add multifamily properties that pays monthly dividends.
Mogul REIT I
Realty Mogul is a real estate investment platform with multiple offerings available to both accredited and non-accredited investors. One such offering is a public non-traded real estate investment trust, Mogul REIT I, which invests in a diverse portfolio across multiple property types. The REIT has an annual dividend yield of 6% and historical total returns of 9.8%.
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 unique 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.
Benzinga’s research team has identified several undervalued REITs with major upside and strong dividends.
Get weekly updates on the REITs we’re watching and take advantage of this major opportunity in the market right now.
Frequently Asked Questions
Do REITs have to be publicly listed?
No. Public REITs are publicly listed. However, some REITs are private and do not trade on open exchanges. Instead, they are only available through qualifying brokers and thus are not listed.
Are non-traded REITs public?
No. Public REITs are typically bought and sold on market exchanges, just like stocks. Private REITs, on the other hand, aren’t traded. Investors looking to purchase shares of private REITs must be accredited and have to work with qualifying brokers.
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