Private REITs Vs. Public REITs: What Wealthy Investors Prefer

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Key Takeaways

• Public REITs have easier access, greater liquidity and greater transparency, appealing to the larger investing public worldwide.
• Private REITs typically offer the potential for higher returns and more control but have limited availability, reduced liquidity, and less regulatory oversight.
• Accredited and high-net-worth investors may gravitate towards private REITs to access personalized strategies and exclusivity, albeit with additional due diligence and higher minimum investments.
• Knowing the fee structure, tax implications and terms of each REIT type is critical to properly evaluating long-term returns and risk.
• For a private REIT, that means doing the research on the sponsor, underlying assets and investment terms to make sure they’re credible and in line with your goals.
• Exit strategy, too — liquidity and market conditions play a big role in whether you can sell or redeem REIT investments.

Private REITs provide fewer daily price fluctuations but require more capital to launch and are much harder to liquidate quickly.

Public REITs trade on stock exchanges, so they’re easy to buy or sell but can move with the market.

This guide reveals key takeaways and actual decisions these investors make.

The Two Structures

Private and public REITs have different structures, regulations and monetization methods. Their key distinctions appear in investor accessibility, the regulatory oversight they encounter, and the returns they may generate. Rich investors balance these considerations in a way that makes sense given their objectives, timeline, and appetite for risk.

Public REITs

Investors globally have been able to purchase shares of publicly traded REITs on leading stock exchanges. You don’t have to have a lot to start, just a brokerage account. This is what makes public REITs so accessible; everyone can get into real estate without big bucks.

Public REITs are liquid. You are free to sell your shares whenever the markets are open. This liquidity is great since you don’t have to fret about your money being tied up for years. A lot of investors like this because it makes sense for both short and longer term planning.

Regular dividend payments, often quarterly, are a key feature of public REITs. They have to distribute a minimum of 90% of their taxable income as dividends. Dividends are stable, in the neighborhood of 5-6% annually. It’s also simple to reinvest dividends or cash out as needed.

Transparency is a huge attraction. These REITs file to regulators, publish earnings quarterly and host investor calls. This provides you with real-time information, enabling you to react quickly when the market shifts.

Private REITs

You can’t simply purchase private REITs on the public market. They’re typically just for accredited investors—those with high incomes or wealth. That keeps the access restricted to a smaller number.

Private REITs can typically yield more—a few, often 7-8% a year—because they don’t have as much competition and can select deals that public REITs cannot. They are less directly linked to the volatility of public markets, which many investors consider a benefit.

Private REITs are illiquid. You might have to leave your cash in for 5-10 or more years. Selling early too can be difficult or expensive. That’s why these are better for folks who won’t need their money anytime soon.

Private REITs may be more adaptable. They could specialize in a property type or use tactics public REITs can’t, such as 1031 exchanges and bonus depreciation for tax deferral. This allows them to customize their portfolios to cater to market niches or investor demands.

Investor Access

REIT access manifests differently in public and private markets. The manner in which investors participate, trade and exit these investments mirrors how public REITs provide access to the masses and private REITs are consigned to an exclusive fraternity with deeper pockets and more sophistication.

The Public Market

Public markets make it easy for most individuals to trade REIT shares. Anyone with a brokerage account can participate, and minimum amounts are significantly less than private REITs. Investors can purchase a single share or a small lot, allowing even those with minimal capital to get exposure.

REIT shares trade on major public exchanges, like the NYSE. This instant trading allows investors to react to market fluctuations immediately. Prices may fluctuate daily, fueled by news and interest rates and market shifts. Volatility can impact returns, but it ensures investors are never captive for extended stretches.

Liquidity is a huge pull; if you want out, you can generally unload in minutes. Public markets have transparency and regulation as well. Exchange-traded REITs are required to adhere to rigorous reporting standards, disclose audited financial statements, and comply with regulatory obligations.

This transparency fosters confidence among investors globally. It’s a wide spectrum of choices—there’s equity REITs that own property, mortgage REITs that own real estate debt and hybrids. The variety assists investors align with their risk appetite and investment approach.

The Private Placement

Private REITs are designed for another audience. These are not exchange traded. Instead, they are sold in private placements to accredited investors—individuals who satisfy certain income or net worth requirements. In the past few years, the JOBS Act simplified access for high-net-worth individuals, but the threshold is still high.

Minimum investments can be as low as €50,000 to significantly more, and investors have to demonstrate financial savvy. Regulation for private placements is lighter than it is for public REITs. Disclosure is not as stringent; therefore, vetting is key.

Investors are typically presented with extensive offering documents and have to dig through those carefully to find fees, risks, and exit terms. Private REITs can customize their portfolios, aiming at specialized markets or special strategies that public REITs would not dare to approach.

Lockups, of course—five, seven, ten years, sometimes. Redemption policies are firm—annual or quarterly windows, which can be capped or even closed if markets are tight. Private REITs, on the other hand, are less liquid—investors should anticipate having their money locked in for years.

K-1 tax forms, for example, can arrive late, complicating matters further for cross-border or time-sensitive investors.

The Wealthy Investor’s Choice

Wealthy investors consider several issues when reviewing private and public REITs. Control, transparency, performance, liquidity and fees influence these decisions. Higher net worth investors, deemed accredited, can tap private REITs with higher minimum and longer commitments, but potential for stronger returns and exclusivity.

1. Control

Private REITs allow investors additional control over the management of their money. With investment minimums ranging from $1,000 to $100,000 and three to 10 year lock-ups, private REITs appeal to investors who desire a more active role in decisions.

This control allows investors to customize strategies, select assets, and fine-tune their exposure to industries such as data centers or student housing. It’s not unusual for private REITs to let investors collaborate with managers, examine operating plans and even adjust allocations as objectives or markets evolve.

For a lot of people, this hands-on capability assists customize risk and return to their specific needs, providing an ownership that public funds don’t deliver.

2. Transparency

Public REITs have to comply with rigorous reporting requirements. These companies submit periodic reports, disclose audited financials, and issue material event announcements, allowing investors to monitor performance and identify risks as they emerge.

This kind of transparency establishes confidence, particularly to those who wish to be informed or comply with regulations. Private REITs, on the other hand, are not. They report less often and disclosure is much less detailed.

This can make it more difficult to evaluate risk or detect problems early. That’s why in private REITs, due diligence is key. Rich investors might use third-party advisors or deep reviews before investing large sums.

3. Performance

Historically, private REITs have delivered higher dividend yields than public REITs—sometimes twice as much. They’re less connected to daily stock market gyrations, which makes their returns smoother in stressful times.

These private funds employ strategies focused on high-growth real estate sectors with net IRR potentially ranging between 6% and over 15%, depending on the fund type. By comparison, public REITs are more susceptible to market changes and may be more volatile, however they provide more information for monitoring performance.

For others, a blend of 79% private and 21% public real estate can help to balance risk and return.

4. Liquidity

Public REITs trade on exchanges and can be purchased or sold in minutes. This renders them convenient to get in or get out of, something that attracts investors seeking liquidity.

Private REITs, though, have defined exit periods, so funds are tied up for years. This reduced liquidity implies less flexibility to react to shifts, but it supports certain investors in concentrating on long term growth.

5. Fees

Public REITs tend to have lower fees, and lower fees can help net returns. Private REITs can charge premiums for active management, unique assets or exposure to high-growth sectors.

Over the years, fees compound and fee structures influence long-term results. Some wealthy investors will pay these higher fees in private REITs if they think the returns and/or risk profile make it worth it.

The Due Diligence

Checking a REIT is more than eyeballing its yield or glossy brochure. Rich investors have a checklist, balancing sponsor quality, asset health and deal terms. Good due diligence is actually doing due diligence—digging into reports, looking for high leverage, understanding cash flow.

It means asking the right questions—particularly with private REITs, which can lock up capital for as long as a decade and depend on sponsor discretional payouts. Below, find the crucial steps and considerations that form intelligent due diligence for private and public REITs.

Vetting the Sponsor

One of the biggest signals for private REITs is a sponsor’s track record. Longtime backers with superstrong exits prove they can survive the cycle, not just surf the boom. Historical deals, particularly through downturns, say more than recent wins.

Inquire into the sponsor’s experience with similar asset classes and regions. Are they commercial, residential or mixed? What about their attitude toward risk and leverage? How do they react when the market changes? Answers provide perspective into how they’ll handle your funds.

Financial discipline is crucial. A sponsor with iffy balance sheets or pending lawsuits is a red flag. Verify transparency—good sponsors provide transparent, prompt updates and engender trust. Their name can attract good tenants and partners, energizing the project.

Analyzing the Assets

Asset analysis is critical, particularly for private REITs. Each property must be audited for occupancy, rent appreciation and upkeep. IRR projections of over 25% may appear alluring, but they require context.

Examine leverage ratios and cash flow. Large debt can magnify returns but risk. Location does value. Homes in stable, growing metro areas generally outperform those in diminishing towns.

Foreign investors must examine market trends, balance of supply and demand and infrastructure projects nearby. Portfolio mix matters—diversifying across asset classes (office, retail, logistics) can reduce risk. Quality impacts returns and volatility. Prime buildings endure in downturns. Lower-grade assets may yield more but can depreciate quickly in a soft market.

Understanding the Terms

It’s crucial to understand the details of any deal. Private equity deals have commitment periods of 3 to 10 years. Lock-up terms, redemption rules and payout triggers form liquidity and flexibility.

Be on the lookout for clauses on manager discretion—some private REITs allow sponsors to keep profits or defer distributions. Examine all materials—financials, YTD results. The JOBS Act has opened the floodgates for deal flow, but certainly not all offerings are created equal.

Work with legal counsel to identify surprise fees or unfriendly terms.

Due Diligence Checklist

• Review sponsor’s history, financials, and reputation.
• Analyze underlying assets for performance, quality, and location.
• Understand lock-up periods, payout rules, and all fees.
• Check cash flow, leverage, and correlation with broader markets.
• Inspect legal documents; seek professional advice.

The Tax Implications

Taxation guides the way investors perceive private and public REITs. Both have to distribute at least 90% of earnings to shareholders, so they avoid paying corporate tax on the cash distributed.

PUBLIC REITS, THE LISTED ON MAJOR EXCHANGES, FREQUENTLY PAY DIVIDENDS THAT ARE ORDINARY INCOME. Because of the TCJA, they can deduct 20% of these dividends through 2025, bringing the top federal tax rate down from 37% to 29.6%. That’s for any US REIT ordinary dividend, regardless of where the REIT owns property. REIT capital gain dividends, however, are hit with an additional 3.8% net investment income tax.

Here’s a look at the main tax differences:

Private REITs, which are typically organized as LLCs, allow all tax advantages to flow straight through investors. There’s potential for tax deferral, as well. For instance, certain private REITs utilize mechanisms such as 1031 exchanges to allow investors to defer taxes by rolling capital gains into new transactions.

This is difficult to accomplish with public REITs, which almost never provide this kind of direct tax deferral instrument. Private REITs usually issue K-1s instead of 1099-DIV. K-1s tend to arrive late in the tax season, and handling them could imply filing an extension. Some investors consider this a pain, others appreciate the additional granularity or foresight.

All these tax distinctions are significant for planning and performance. High-income or complicated-tax-need investors might prefer private REITs for the potential to defer taxes or customize deductions.

Public REITs meanwhile provide transparent simple tax reporting and still provide a healthy dividend deduction. Choosing between the two usually hinges on how much tax complexity an investor is willing to deal with, and how much they value cash flow versus long-term gains.

The Exit Strategy

A well defined exit strategy is an important piece of any REIT investment plan. Public versus private REITS have differing mechanisms for investors to exit, with the ease of such being dependent on many factors. Rich investors tend to focus on more than just a great entry point—they want to know when and how they can exit, and for how much.

On the other hand, public REITs make exit that much easier. Investors can sell shares on an exchange, primarily during normal trading hours, and typically receive cash within a few days. This liquidity means investors can respond quickly to market shifts. During a period of crisis – say, 2008 or 2009, selling is possible, but not always at a good price. A decline in share price can translate to a loss if you have to make a quick exit.

Bear markets can produce wild price swings, so even with substantial liquidity, timing an exit is dicey. Private REITs operate in a different manner. These tend to have extended lockup periods, from 3-10 years but occasionally longer. Some investments may have to be held for ten years or more before an exit is permitted.

Early exits could have steep penalties or perhaps not even be feasible unless a secondary market for the buyer exists but this market could be illiquid. For instance, a private REIT can often only allow investors out on specific dates, such as quarter or year end, and even then, only if there is sufficient cash. That makes exit planning significantly more difficult and less predictable.

Liquidity is where it’s at in exit planning. Public REITs provide daily liquidity, but prices can drop rapidly in weak markets. Private REITs are less bound up in daily market gyrations, which can shield investors from panic selling, but they’re slower and sometimes expensive to get cash out of. Some private REITs are highly leveraged—sometimes with as little as 10% equity and the balance in debt.

If markets turn, this leverage can damage returns and make exits even more difficult. Market factors dictate every exit strategy. In a strong market, public and private REIT exits can both proceed seamlessly. In downturns, public REITs can experience steep price declines, and private REITs can freeze redemptions or block exits entirely.

Private REIT investors may need to prepare for a more challenging exit route, with potential obstacles including market volatility, heavy leverage and harsh redemption fees.

Conclusion

Private REITs attract individuals who desire greater control and less market noise. Public REITs offer liquid trades and convenient access. They both require due diligence and defined exit strategies. Tax rules can influence decisions, so savvy planning counts. Each route offers genuine dangers and genuine advantages. Rich investors don’t hustle. They examine metrics and experience, not marketing blather. To do it right, explore each, pose hard questions, and consider your own objectives. Call a trusted adviser or review real case studies before you invest. Wise actions today can assist you in creating a powerful tomorrow.

Frequently Asked Questions

What is the main difference between private and public REITs?

Private REITs are not listed on stock exchanges and are subject to less regulation. Public REITs are listed, more regulated, and provide more transparency and liquidity.

Why do some wealthy investors prefer private REITs?

Private REITs, on the other hand, offer wealthy investors the potential for higher returns, access to exclusive opportunities, and diversification for their portfolio — with less liquidity and a higher risk.

Are private REITs accessible to all investors?

No, private REITs generally have high minimum investment requirements, and can only be sold to accredited or institutional investors because of regulations.

How do public REITs provide liquidity?

Public REITs are listed on stock exchanges, so you can trade their shares at will, making them far more liquid than private REITs.

What should investors consider during due diligence?

Investors should consider a REIT’s track record, management team, asset portfolio, fee structure and regulatory compliance before investing.

How do tax implications differ between private and public REITs?

Both can be tax-advantaged, but private REITs may have more complicated tax reporting. Public REITs typically send investors KISS tax forms.

What is the typical exit strategy for private REITs?

Private REITs can have limited exit options, with investors needing to wait for a liquidity event — like a sale or public offering — in order to get their money out.