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A private real estate investment trust (REIT) can make a solid investment and help diversify an existing portfolio. It features a unique set of benefits and may even offer greater dividend yields and returns than a publicly-traded REIT. Private REITs also typically maintain lower compliance costs than public REIT counterparts.
As a result, it’s worth exploring the private REIT and considering it as a potential investment. However, these asset classes are not without drawbacks. Use this guide as a reference before deciding whether or not to invest in private REITs.
What is a REIT?
A real estate investment trust (REIT) is a company that owns, operates and sometimes finances income-producing real estate. REITs can invest in either residential or commercial real estate properties — such as houses, condos, office buildings, parking lots, shopping malls and more. REITs give investors an opportunity to indirectly reap the returns on an investment property, without having to buy, mortgage, operate and manage the property themselves.
As an asset class, REITs are praised for providing diversification, especially as a counterbalance to stocks, bonds and other investments. A REIT is also renowned for offering potentially higher returns coupled with lower risk. It generates returns in two ways — through capital appreciation and rental income. REITs collect income and pay returns to investors in the form of dividends.
What Is a Private REIT?
When most people think of REITs, publicly-traded REITs come to mind. These companies are listed on major stock exchanges, and shares can be bought and sold like regular securities. Publicly-traded REITs are also subject to the same compliance regulations as other publicly-traded companies, and much of the pertinent financial information is readily available.
Private REITs are not listed on major exchanges and are not subject to most SEC regulatory requirements. A private REIT tends to be made up of illiquid investments, meaning the shares can’t be quickly exchanged for cash. It is typically sold by brokers and most are only available to accredited and institutional investors. Accredited investors are individuals with a net worth of at least $1 million (not including their primary residence) or with income exceeding $200,000 over the past 2 years ($300,000 with a spouse).
Some REITs are public but not listed on a major exchange. These types of REITs are generally offered by real estate crowdfunding platforms and share some similarities to publicly-traded REITs and private REITs. For instance, a public, non-traded REIT is illiquid, but it is subject to many of the same regulatory and investor protection requirements that apply to publicly-traded REITs.
Who Should Invest in Private REITs?
Since private REITs are a long-term investment, they're only recommended for investors that are able to keep their funds tied up for at least 3 to 5 years. Investors should also be aware of, and comfortable with, the additional risks that go along with investing in private REITs.
What Are the Benefits of Investing in a Private REIT?
Private REITs come with numerous benefits. Take a look at some of the reasons why investors incorporate this asset class into their portfolios.
On average, private REITs tend to have higher dividend payouts than comparable public REIT counterparts. Historically, public REITs on average have had dividend yields within the 5% to 6% range. According to the National Real Estate Investor, private REIT dividend yields have hovered around 7% to 8% historically.
Less market volatility
A private REIT tends to calculate its share price every quarter, meaning it doesn’t undergo day-to-day market fluctuations like other asset classes including stocks, bonds or public REITs. Less market volatility can be appealing for investors looking for more consistent returns and portfolio valuations.
Real estate investments have little correlation to the stock market — making them an important way to bring balance to a portfolio. This factor is especially true for private REITs, which normally undergo minimal day-to-day value fluctuations.
Lower compliance costs
A public REIT is required to comply with SEC guidelines. It must produce regular financial reports and follow corporate governance rules — all of which can become costly. On the other hand, private REITs are subject to few regulatory requirements and can save significantly on filing costs.
Potential Drawbacks of Investing in Private REITs
A private REIT comes with its fair share of risks investors need to be aware of. The biggest drawback tends to revolve around lack of transparency. Because a private REIT is exempt from SEC registration, it is not subject to the same regulatory scrutiny as a public REIT. As a result, it can be challenging to find reliable performance data and financial information on certain private REITs. Lack of liquidity coupled with relatively higher investment minimums are other potential drawbacks of private REITs.
Benzinga’s Best REITs
At Benzinga, we’ve done the research on the best private REITs so you don’t have to. Take a look at these top candidates or find out more about our picks for the best private REITs.
- DiversyfundMore DetailsBest ForLow Cost Real Estate Investing
- StreitwiseMore DetailsBest ForSmall Account Real Estate Investing
- FundriseMore DetailsBest ForBeginner real estate investors
In some ways, private REITs can offer greater potential for returns than public REITs. Nevertheless, private REITs are not without drawbacks, and some investors may not be comfortable with undertaking the type of risk associated with investing in securities exempt from SEC registration. Plus, private REITs are only available to accredited investors, meaning the general public is excluded from this type of asset class.
If you’re considering investing in a private REIT, make sure to conduct your due diligence and read through the company’s financials before making a decision. As always, come back to Benzinga for more investment tips, advice and education content.
Frequently Asked Questions
Is a private REIT a good investment?
It can be. Historically, private REITs on average generate greater returns than public REITs. However, private REITs also come with a fair share of risk and are exempt from SEC registration. Freedom from regulation can muddle transparency. Private REITs are also only open to accredited investors, not the general public.
How are private REITs structured?
Private REITs are structured similarly to public REITs. The REIT buys and leases real estate, collecting rent on the properties and then distributing that income as dividends to shareholders. The major difference is that private REIT shares are only available to purchase through brokers, while public REIT shares can usually be bought on major exchanges.
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