What are Private REITs?

Investing in private real estate investment trusts (REITs) offers individuals a unique opportunity to participate in real estate ownership and income generation without directly managing properties. Unlike public REITs, which are listed on stock exchanges, private REITs are not publicly traded, allowing them to operate with less market volatility and a longer-term focus.

These investment vehicles typically focus on income-generating properties, like multifamily apartments, office buildings, or industrial spaces, offering investors the chance to benefit from steady dividends and potential appreciation. For those seeking exposure to real estate’s potential rewards without day-to-day oversight, private REITs can be an attractive addition to a diversified portfolio.

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. 

How do Private REITs Work?

When most people think of REITs, public REITs come to mind. These companies are listed on major stock exchanges, and shares can be bought and sold like regular securities. Public REITs are also subject to the same compliance regulations as other public 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 public 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 public REITs.

Who Should Invest in Private REITs?

Since private REITs are a long-term investment, they're only recommended for investors who 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.

Benefits of Investing in Private REITs

Private REITs come with numerous benefits. Take a look at some of the reasons why investors incorporate this asset class into their portfolios. 

• Higher Dividend Yields: Private REITs typically offer higher dividend payouts compared to public REITs. While public REIT dividend yields average around 5% to 6%, private REITs have historically yielded 7% to 8%, according to the National Real Estate Investor.
• Reduced Market Volatility: Private REITs calculate share prices quarterly, avoiding daily market fluctuations. This reduced volatility can appeal to investors seeking stable returns and more consistent portfolio valuations.
• Portfolio Diversification: Real estate investments generally have a low correlation to the stock market, making them a valuable tool for portfolio diversification. Private REITs, in particular, experience minimal daily value fluctuations, further balancing a portfolio.
• Lower Compliance Costs: Unlike public REITs, which must adhere to SEC guidelines, file regular reports, and follow strict corporate governance rules, private REITs face fewer regulatory requirements, resulting in lower filing and compliance costs.

Drawbacks of Investing in Private REITs

While private REITs offer several benefits, they also come with some drawbacks that investors should consider.

• Limited Liquidity: Unlike public REITs, private REITs are not traded on major exchanges, which can make it challenging to sell shares when needed. Investors may need to hold onto their investments longer than anticipated.
• Higher Investment Minimums: Private REITs often require higher minimum investments, which may make them less accessible for some investors compared to publicly traded REITs or other investment options.
• Less Transparency: Private REITs are not subject to the same SEC reporting requirements as public REITs, resulting in fewer publicly available financial disclosures. This limited transparency can make it harder for investors to assess the REIT’s performance.
• Potentially Higher Fees: Private REITs may have higher management and administrative fees, which can impact overall returns. Investors should carefully review fee structures and understand how these fees could affect long-term profits.
• Accredited Investor Requirement: Many private REITs are only available to accredited investors, limiting access to individuals who meet specific income or net worth criteria. This requirement can exclude many retail investors.

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.

Is a Private REIT a Good Investment?

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. You may also choose to diversify your portfolio using public REITs, and as always, come back to Benzinga for more investment tips, advice, and educational content. 

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