Private REIT vs. Public REIT: Differences Explained

Many people aspire to become homeowners. Buying a home helps you get out of rent payments and build equity with every monthly mortgage payment. Some people branch beyond their first home and become real estate investors. They accumulate large amounts of capital to buy several properties and hire a property management team to stay on top of each one. It’s a lot of work, but real estate is lucrative and draws many people. 

You may be interested in real estate, too, but there’s a better solution for people who want fewer hassles and don’t have the funds to make several down payments. Real estate investment trusts (REITs) streamline real estate investing, so you get cash flow while someone else handles the business side.

What Are REITs?

REITs acquire properties using funds from investors. They are mutual funds for real estate investors that Congress initiated in 1960. Some of these REITs trade on public markets while others are private but have the same objective.

REITs offer diversified real estate portfolios and provide investors with more choices. Do you want to profit from storage facilities and make quarterly cash flow from those assets? Some REITs hold onto the assets and do all of the work for you. If you want to invest in shopping malls, multifamily complexes, healthcare facilities and other types of real estate, you can use REITs instead of pooling funds for an expensive down payment. Some commercial properties require multimillion-dollar down payments that most people cannot afford. Many investors who can afford that down payment would have to forgo portfolio diversification and put all of their eggs in that basket. The affordability of REITs allows investors to choose another solution and still get exposure to commercial properties that require extensive down payments.

REIT investors can get started with as little as $1 if they buy REITs listed on the stock market. Private REITs have higher minimums, but they’re still generous compared to the down payment you would have to make. Private and public REITs are required to distribute 90% of their taxable income to shareholders, and you can reinvest those proceeds automatically to increase future payouts. This 90% distribution rule gives REIT investors more high-yield opportunities than investors who limit their searches to blue-chip stocks.

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

The underlying difference between public and private REITs is how you buy shares. Public REITs trade on the stock market and are more liquid than their private counterparts. Public markets and private markets each present pros and cons. Understanding them can help you make the best decision for your finances.

Private REIT Pros

Here are some of the reasons a private REIT makes more sense than a public REIT.

Higher Yields

REIT investors value their dividends, and private REITs tend to have higher yields than public REITs. The greater accessibility of publicly traded REITs is a blessing and a curse. Public REITs can reach higher valuations because more money flows into them, and as investors buy more shares, the dividend yields decrease. Private REITs do not suffer from public market crowds pouring money into them and creating lofty valuations for new investors. 

Better Profit Margins

Maintaining a public REIT is expensive. These REITs have to pay compliance costs that allow them to remain on public markets. Private REITs have lower regulatory expenses, which helps them maintain healthier profit margins than publicly traded REITs. 

Less Volatility

There’s no reason to check on your private REIT every day. Unlike REITs that trade on public markets, private REITs do not experience price fluctuations. The private firm may update the REIT’s price quarterly. This is a stark difference from public REITs, where the price can change if you refresh your screen during market hours. Private REITs provide more stability, and you can tune out the noise.

Public REIT Pros

Private REITs can be a great choice for your portfolio, but public REITs also have several advantages to consider.

More Liquidity

You can get in and out of a public REIT position in seconds. This flexibility allows investors to sell their shares when they fear a correction or need funds to cover an emergency expense. While some investors prefer to forgo liquidity for higher yields, others prefer the liquidity and ease of public REITs. Private REITs may hold onto your funds for a quarter before letting you exit positions, but you can receive cash flow at designated intervals.

You Don’t Have to Be an Accredited Investor

Public REITs are available to anyone. You don’t need a certain net worth or large investment to get started. Some private REIT firms allow nonaccredited investors to buy shares, but you may have to look at public REITs if you don’t meet the criteria.

You Can Get Started with $1

Fractional stock trading has made every publicly traded company more accessible to investors. You don’t need to buy an entire share anymore. Investors can allocate $1 to a publicly traded REIT and see how many shares they get. This greater accessibility leads to higher valuations and lower yields, but not everyone has thousands of dollars ready to put into a REIT. The minimum investment differs for each private REIT, but you may have to invest over $10,000 to get a position in some of them.

Real Estate Without the Barriers and Hassles

Real estate has provided generational wealth for many families, but it hasn’t been available to everyone. REITs have leveled the playing field since their introduction in 1960. Minimal capital requirements and access to cash-flow-producing real estate without the hassle turned REITs into popular investments. Private REITs and public REITs each help investors generate cash flow and benefit from property appreciation.

Frequently Asked Questions