Private vs. Public REITs: Finding the Best Financial Fit

The reasons why an individual chooses to invest vary; however, most cite earning a high return on investment as one of their financial objectives. Whether it is immediate income or capital appreciation, wealth accumulation is a primary consideration for investors.

One investment that meets this financial objective, while providing additional benefits, is a real estate investment trust (REIT). A REIT is “a corporation that owns and/or manages income-producing commercial real estate. When individuals buy a real estate investment trust … share, they are purchasing a share of the company that owns and manages the rental property.”

Historically, REITs – both private and public – have outperformed the stock market, providing investors with higher returns than equity investments. This article reviews the types of REITs that exist, historical returns for private vs. public REITs, and ways to identify suitable investments for a portfolio.

Types of REITs: Public vs. Private

REITs can be classified as either private or public.

Public REITs

Public REITs are regulated by the U.S. Securities and Exchange Commission (SEC). They must meet certain qualifications and register and file regular reports with the SEC.

Public REITs can be further divided into publicly traded and public non-traded. Anyone can invest in either type; however, the form of investment differs. Publicly traded REITs are traded on an exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. Well-known publicly traded REITs include Camden Property Trust (CPT), Realty Income Corp (O), and The Howard Hughes Corporation (HHC). Meanwhile, public non-traded REITs are purchased by working with an individual broker or financial advisor. Public non-traded REITs offer similar benefits and disadvantages as private REITs.

Private REITs

Private REITs are real estate funds or companies that are exempt from SEC registration and are available only to institutional or accredited investors. An accredited investor is defined as either 1) an individual whose net worth is more than $1 million, excluding their primary residence (individually or with a spouse or partner) or 2) an individual whose income is more than $200,000 (individually) or $300,000 (with a spouse or partner) in each of the prior two years and reasonably expects the same for the current year. Investments are available through private placement and, unlike public REITs, require a higher minimum investment, ranging from $1,000 to $25,000 (sometimes more).

REITs in Terms of the Numbers

Introduced in 1960, REITs have become a vital part of our economy. According to data released by Nareit:

While REITs are a major contributor to the economy, what returns are investors potentially going to achieve when adding REITs to their portfolio? To better answer this question, it’s important to look at the historical performance of public and private REITs and outline the risks associated with each. Accredited investors should consider both factors when determining which REIT to invest in.

REITs vs. Stocks

Before reviewing the difference in returns for private versus public REITs, let’s first look at how REITs perform compared to stocks. The Motley Fool explains that “REITs have outpaced the S&P 500's total return since NAREIT began tracking their performance in 1972. Thus, one could definitively state that REITs have outperformed stocks over the long term.” While “that has certainly been the case in more recent years as stocks outperformed REITs in 2019 and the prior 5- and 10-year periods … REITs have come out ahead over much longer timeframes as they've outpaced stocks during the last 20- and 25- year periods.”

Data reveals that “over a 25-year period, the index returned 9.05% compared to 7.97% for the S&P 500 and 7.41% for the Russell 2000.”

Private vs. Public REITs

Return on public REITs – more specifically, publicly traded REITs – can easily be determined. Since shares are publicly traded, these REITs are required to report their earnings and dividends. Looking at the past 10 years, “ as of June 2022, the index's 10-year average annual return was 8.34%. Over a 25 year period, the index returned 9.05% …”

Private REIT data, however, is not so simple to determine. Lack of transparency makes it more difficult for investors to understand what to expect. To help differentiate between the two, we turn to the expert opinion of Brad Thomas, an experienced real estate professional. Thomas recently shared an article outlining the difference between private and public REITs, pointing out that returns on private

REITs have the potential to be higher than those on public REITs. He recalls one of his experiences, which supports this possibility.

“When I harnessed institutional capital in 2003 and 2011 to co-found two net-lease REITs … the founding institutional investments flowed into STORE Capital (STOR) in 2011 and concluded prior to our 2014 IPO. By the time of their exit in the first quarter of 2016, our founding institutional shareholders had generated returns that exceeded their initial expectations and mine; they made an approximate 26% annual rate of return.”

He shares another example of what investors recently experienced in the private REIT sector. “In 2017, Blackstone (BX) introduced the Blackstone Real Estate Income Trust (BREIT), an open-ended privat REIT designed to deliver private real estate asset management to retail investors. … At the end of June 2022, BREIT's NAV per share had risen roughly 50%, versus just a 10% rise in VNQ's [Vanguard Real Estate Index Fund ETF, a publicly traded REIT] per share valuation. Much of the performance divergence rests in BREIT's investment mix.”

Historically, Thomas said, “had you been a buy-and-hold REIT investor between 1990 and 2022, you could have likely been happy socking away your 10.5% annual rates of return.”

Not all data reveals the same returns; however, most reports share the same concept: private REITs offer higher return potential than public REITs. To provide an alternative opinion, let’s look at an article released by The Motley Fool. According to certified financial planner Matthew Frankel, While Mr. Frankel discusses risks associated with private REITs and why they are not a great investment for everyone, he states that, “Generally speaking, private REITs pay higher dividends than comparable public REITs. Public REITs have historically paid dividend yields in the 5–6% range, on average, while private REIT dividend yields have historically been in the 7–8% ballpark, according to National Real Estate Investor.”

Where to Invest

As mentioned, all REITs – private, publicly traded, and public non-traded – all have unique pros and cons.

Public REITs “are a popular way of investing in commercial real estate, especially for those who have limited funds to invest. REITs have a low barrier to entry; someone can buy a single share for less than $100 … [and] these shares are generally highly liquid … [shares] can often be bought and sold with the click of a button just as you would trade other stocks or bonds. The liquidity of [public] REITs … makes them particularly attractive for those who want to diversify their portfolios by investing in commercial real estate, but who cannot or do not want to have their capital tied up for extended periods of time.”

By contrast, those looking for higher return potential should consider private REITs. However, investors must consider the associated risks. Private REITs are

The key to any portfolio is diversification. Incorporating a REIT option, including a private REIT, may protect investors against economic volatility. Those interested in learning more can speak with a qualified professional at Perch Wealth.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

Real Estate Risk Disclosure:

Seeking to Build Wealth Through REIT Investing

Real estate investing has long been considered a reliable way to attempt to build wealth. However, real estate investing requires active management, driving away many of today’s accredited investors. In 1960, a solution to this problem was presented in the form of real estate investment trusts, or REITs – Congress established REITs to “allow individual investors to invest in large-scale, income-producing real estate. REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.”

Since the introduction of REITs, the industry has been booming. National Real Estate Investor recently reported, “The U.S. alone boasts 222 publicly-traded REITs, and IRS records show that about 1,100 listed and non-listed REITs pay taxes. … REITs now operate in 39 countries overall. Today, the market cap of the FTSE Nareit All REITs Index, the broadest index for equity and mortgage REITs in the U.S., stands at $1.1 trillion.”

The question now is, how can one seek to build wealth through REITs? To understand the answer, let’s look at some primary concepts related to REITs, their historical returns, and the process for investing in REITs.

What is a REIT?

A REIT is a company that owns and operates income-producing real estate and real estate-related assets. REITs differ from other real estate funds in their structure and operation. Regarding operational intent, REITs acquire and develop real estate properties for their portfolios; their intent is not to buy and sell for a profit but rather to work to benefit from a long-hold period with the real estate.

Types of REITs

REITs can be broken into three categories:

  1. Equity REITs own and operate income-producing real estate.
  2. Mortgage REITs provide money to real estate owners and operators either directly in the form of mortgages or other real estate loans or indirectly through acquiring mortgage-backed securities.
  3. Hybrid REITs are companies that use the investment strategies of both equity REITs and mortgage REITs.

Generally, individual investors looking to build or preserve wealth invest in equity REITs over mortgage REITs because the latter often comes with greater risk. For example, mortgage REITs tend to be highly leveraged and, consequently, are vulnerable to changing interest rates. Therefore, those hoping to enjoy the benefits potentially provided by a REIT should consider an equity REIT option.

Seeking to Build Wealth Through REITs

REITs offer various potential avenues investors can leverage to attempt to build wealth. Here are a few.

Which REITs should one consider investing in?

REITs can be categorized in various ways, and most of today’s REITs specialize in investments in certain asset classes. For example, there are retail REITs, office REITs, residential REITs, healthcare REITs, and industrial REITs, to name a few. While each offers a different level of return potential, recent data from Motley Fool outlines how various REIT subgroups performed in recent decades compared to the S&P 500; it shows that all REIT subgroups have outperformed the S&P 500. The S&P 500 experienced a 9.3 percent average annual total return between 1994 and 2019. In contrast, office REITs averaged 12.9 percent; industrial REITs averaged 14.1 percent; retail REITs averaged 12 percent; residential REITs averaged 13.7 percent; diversified REITs averaged 9.8 percent; health care REITs averaged 13.4 percent; lodging/resort REITs averaged 10.2 percent; and self-storage REITs averaged 16.7 percent.

Thus, most REITs have the potential to help investors build wealth.

How does one invest in a REIT?

Investors – depending on their financial position – have three options for investing in REITs.

All investors can invest in publicly traded REITs and publicly non-traded REITs. Publicly traded REITs are regulated by the U.S. Securities and Exchange Commission (SEC); shares of these REITs are listed on a national securities exchange and publicly traded. Non-traded REITs are also registered with the SEC but are not publicly available. Rather, most investors must work with an individual broker or financial advisor.

While public non-traded REITs generally come with higher commissions and are less liquid, they tend to offer investors the potential for higher returns and greater stability since they are not subject to market fluctuations. However, this comes with increased risk, as well.

A third option – private REITs – are generally available only to institutions or accredited investors. This option typically represents the highest potential for both returns and risk.

Today, hundreds of REITs collectively own trillions in gross assets across the United States. Identifying which REIT is most suitable for a portfolio is best done by speaking with a qualified professional about today’s investment opportunities.

(1) The National Association of Real Estate Investment Trusts (NAREIT), which was formed in 1960, has been keeping track of historical return data for the REIT sector since 1972. It has developed several indexes to track returns, led by the FTSE NAREIT All Equity REIT Index. This index contains all 12 equity REIT subsectors (it excludes mortgage REITs, which aren’t classified in the real estate sector but are instead considered financial companies).

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

Real Estate Risk Disclosure: