Public vs Private REITs: Maximize Wealth in Real Estate

-Shekhar Tripathi

May 31, 2024

Introduction

As the global real estate market continues to evolve, astute investors are constantly seeking innovative avenues to unlock its lucrative potential. In this pursuit, REITs (Real Estate Investment Trusts) have emerged as a compelling investment vehicle, offering a unique blend of income generation, portfolio diversification, and exposure to a wide range of real estate assets, including commercial property. However, the decision to invest in public or private REITs is a multifaceted one, requiring a nuanced understanding of the distinct advantages, risks, and considerations associated with each option.

This comprehensive market analysis aims to provide investors and shareholders with a detailed exploration of the public and private REIT landscapes. By delving into the intricacies of these investment vehicles, investors can gain valuable insights to inform their decision-making process, tailoring their approach to align with their specific financial goals, risk profiles, and investment horizons. Additionally, understanding the strategic investment opportunities within these REITs can further enhance portfolio performance and long-term value creation.

Understanding REITs: A Primer

Before delving into the intricacies of public and private REITs, it is crucial to understand the fundamental premise of REITs. A REIT is a company that owns and operates income-generating real estate properties or invests in mortgage-backed securities. By adhering to specific regulatory requirements, REITs enjoy favorable tax treatment, allowing them to distribute a significant portion of their taxable income to shareholders in the form of dividends.

REITs provide investors with exposure to a diversified pool of real estate assets without the need for direct property ownership or management responsibilities. This diversification can mitigate the risk associated with owning individual properties while offering the potential for steady income streams and capital appreciation. From 1972 through 2023, all equity REITs have returned 11.11%. This return includes a massive correction in 2022 when the REIT index lost 25% of its value.^[1]

Source: Nareit

The REIT industry has experienced substantial growth over the past decades, with a total equity market capitalization of over $2 trillion as of Q1, 2024, according to data from Nareit^[2]. This growth can be attributed to factors such as the increasing demand for real estate investments, the transparency and liquidity offered by REITs, and their ability to provide exposure to various property types across multiple geographic regions.^[3]

Public REITs: Public REITs are listed on major stock exchanges and are regulated by the U.S. Securities and Exchange Commission (SEC). These REITs offer high liquidity as they can be easily bought and sold through the stock market. Public REITs must distribute at least 90% of their taxable income to shareholders in the form of dividends, which are typically in the range of 5-6% annually.^[4]

Private REITs: Private REITs, on the other hand, are not traded on public exchanges and are not subject to the same regulatory scrutiny as public REITs. They are often only available to accredited investors and institutional buyers, with minimum investment thresholds significantly higher than those of public REITs. Private REITs often offer higher dividend yields, ranging from 7-8%, due to lower regulatory costs and higher risk premiums.^[4]

Key Differences Between Public and Private

Liquidity and Access

One of the most significant differences between public and private REITs is liquidity. Public REITs provide high liquidity, allowing investors to buy and sell shares with ease on the stock market. This makes them suitable for investors who might need to access their capital quickly.^[5]

In contrast, private REITs are less liquid, often requiring investors to commit their capital for extended periods, sometimes five to ten years or more.^[5] This lack of liquidity in private REITs is offset by the potential for higher returns, as investors are often compensated for tying up their capital over longer durations.

Regulatory Oversight

Public REITs are subject to stringent regulatory oversight by the SEC, ensuring a high level of transparency and regular financial disclosures. This oversight helps protect investors but also increases operational costs, which can impact returns. The SEC mandates that public REITs comply with regular reporting requirements, including quarterly earnings reports and annual financial statements, providing a clear view of their financial health and operational performance.^[1]

In contrast, private REITs, while offering potentially higher returns due to lower regulatory costs, come with less transparency and higher risks. They are not required to provide regular financial updates or comply with the same level of regulatory scrutiny as their public counterparts. This lack of oversight can lead to increased risk for investors, who must rely heavily on the integrity and management practices of the private REIT’s operators.^[4]^[6]

Performance and Volatility

The performance of public REITs can be highly correlated with the stock market, leading to greater volatility. This means that in times of market turmoil, public REITs can experience significant price swings. For instance, during periods of economic downturn or stock market corrections, the share prices of public REITs may drop substantially, reflecting broader market sentiments rather than the underlying value of the real estate assets they own.^[7]

Private REITs, however, are generally insulated from daily market fluctuations, which can result in more stable performance over the long term. The valuation of private REITs is typically based on the intrinsic value of their real estate holdings, rather than market sentiment, leading to less price volatility. However, this stability comes with the trade-off of reduced liquidity, making it more challenging for investors to exit their positions quickly if needed.^[7]

Dividend Yields

Dividend yields from REITs are a critical consideration for income-focused investors. Public REITs typically offer dividend yields in the range of 5-6%, which can be attractive for those seeking steady income from their investments. These dividends are derived from the rental income generated by the REIT’s property holdings and must be paid out to comply with the REIT structure requirements.

Private REITs, on the other hand, often offer higher dividend yields, ranging from 7-8%, due to their ability to invest in higher-yielding, less liquid assets. This higher yield can be particularly appealing for investors willing to accept the lower liquidity and higher risk associated with private REIT investments. However, the lack of regulatory oversight and transparency means that these higher yields can also come with increased risks.

Tax Implications

Both public and private REITs offer tax advantages, such as the avoidance of corporate taxes if they adhere to the 90% income distribution requirement. However, the tax treatment of dividends can vary. Public REIT dividends are typically taxed as ordinary income, which can be significant for some investors. This taxation can reach up to 37% depending on the investor’s income bracket, with an additional 3.8% Medicare surtax on investment income.^[8]

Private REITs, on the other hand, may offer additional tax benefits. These can include depreciation deductions, which can offset taxable income, and the potential for capital gains tax deferral through strategies like 1031 exchanges.^[9]Depreciation and amortization can significantly reduce taxable income from private REIT investments, providing a more favorable tax treatment for high-net-worth investors who can leverage these strategies effectively.

Evaluating Your Investment Goals: Making the Right Choice

Before deciding whether to invest in public or private REITs, it is essential to evaluate your investment goals, risk tolerance, and liquidity needs. Public REITs offer easier access and greater liquidity, making them a viable option for investors looking for flexibility. In contrast, private REITs can offer higher returns and stability at the cost of liquidity and increased risk. Here’s a more detailed breakdown:

Investment Horizon and Liquidity Needs

Public REITs: These are ideal for investors seeking short to medium-term liquidity and flexibility. Public REITs are traded on stock exchanges, making it easy to buy and sell shares as needed. This liquidity makes them suitable for investors who may need to access their capital quickly or prefer to adjust their portfolios frequently.
Private REITs: These are better suited for long-term investors who can commit their capital for several years. The illiquid nature of private REITs means that investors should be comfortable with tying up their funds for extended periods, typically five to ten years or more.

Risk Tolerance

Public REITs: Tend to have lower risk due to stringent regulatory oversight and greater transparency. They are subject to regular financial disclosures, which helps in assessing their performance and potential risks. However, they can be more volatile due to their correlation with the stock market.
Private REITs: Generally come with higher risks due to less regulatory oversight and lower transparency. These REITs often involve higher-yield investments, such as commercial property, that can be more susceptible to market fluctuations and economic downturns. Investors must conduct thorough due diligence and be prepared for potential risks.

Income and Growth Objectives

Public REITs: Offer regular income through dividends, making them suitable for income-focused investors. The dividend yields, typically around 5-6%^[4], provide a steady income stream.
Private REITs: Can offer higher dividend yields, often ranging from 7-8%^[4], due to their ability to invest in high-yield properties and lower regulatory costs. These higher yields are attractive for investors seeking substantial income and willing to accept higher risks. In conclusion, understanding the strategic investment opportunities and tax implications of public versus private REITs is crucial for shareholders looking to meet their financial goals. Whether focusing on liquidity, risk management, or income generation, a tailored approach based on thorough market analysis will help investors make informed decisions.

Diversification and Portfolio Balance

Public REITs: Provide broad exposure to various real estate sectors, including commercial, residential, industrial, and retail properties. This diversification helps spread risk across different asset classes and geographic locations.

Private REITs: Allow for more specialized investments in niche markets or specific types of properties not typically available through public REITs. This can include distressed assets, high-growth markets, or unique property types, providing opportunities for significant growth and higher returns.

Conclusion

Investing in REITs, whether public or private, offers a robust means to diversify your portfolio and generate income. This strategic investment choice between public and private REITs should be guided by individual financial goals, risk tolerance, and investment horizons. Public REITs offer liquidity, transparency, and steady income, making them suitable for conservative investors. In contrast, private REITs provide higher yields and unique investment opportunities, appealing to high-net-worth individuals willing to accept higher risks for potentially greater returns. Let’s go through a quick summary of the features offered by both types of REITs.

Public REITs: Accessibility and Liquidity

Public REITs, as the name suggests, are companies that trade on major stock exchanges, akin to traditional publicly traded corporations. These REITs offer investors several advantages, including:

Liquidity: Shares of public REITs can be bought and sold with relative ease, providing investors with the flexibility to enter or exit positions as needed. This liquidity can be particularly appealing for investors with shorter investment horizons or those seeking to rebalance their portfolios regularly.

Transparency and Regulation: Public REITs are subject to stringent regulatory oversight and disclosure requirements, ensuring a high level of transparency for investors. These companies must adhere to strict reporting standards, providing detailed financial information and operational updates on a regular basis.

Diversification: Public REITs often invest in a diverse range of property types, such as residential, commercial, industrial, and healthcare properties. This diversification can help mitigate the risk associated with overexposure to a single property sector or geographic region.

Access to Capital Markets: Public REITs have access to capital markets, enabling them to raise funds through equity or debt offerings. This access to capital can facilitate growth opportunities, acquisitions, and the development of new properties.

However, it is important to note that public REITs are subject to market volatility and can be influenced by broader economic conditions and investor sentiment, which can lead to fluctuations in share prices.

Private REITs: Exclusivity and Potential Upsides

In contrast to their public counterparts, private REITs are not traded on public exchanges and are typically available only to accredited or institutional investors. These REITs offer several distinct advantages, including:

Reduced Volatility: Private REITs are generally insulated from the short-term fluctuations and volatility associated with public markets. This reduced volatility can provide a more stable investment environment, appealing to investors seeking consistent returns over an extended period.

Potential for Higher Returns: Private REITs often employ more aggressive investment strategies, such as value-add or opportunistic approaches, which can yield higher potential returns compared to core or core-plus public REIT strategies. However, it is important to note that these higher potential returns typically come with an increased level of risk.

Greater Control and Oversight: As private REITs have a smaller investor base, investors may have greater influence over decision-making processes and can more closely monitor the management team’s performance and strategic direction.

Access to Niche Opportunities: Private REITs can target niche or specialized real estate sectors that may be overlooked or underrepresented in the public REIT market. This can include investments in unique property types, niche geographic markets, or opportunistic real estate transactions.

Longer Investment Horizons: Private REITs often have longer investment horizons, ranging from five to ten years or more. This extended time frame allows for the execution of value-add strategies and can potentially provide greater returns over the long term.

However, it is crucial to note that private REITs are generally less liquid than their public counterparts, as shares cannot be readily traded on public exchanges. Additionally, private REITs may have higher minimum investment requirements and stricter accreditation criteria for investors.

By understanding the distinct features and benefits of each, investors can make informed decisions that align with their long-term wealth management strategy, ultimately optimizing their portfolios for both stability and growth.

Sortis REIT: The Sortis Advantage

One compelling option for private REIT investors is the Sortis REIT (S-REIT). Sortis REIT stands out for several key reasons. It’s tailored for accredited investors, requiring a minimum investment of $25,000. Investors enjoy quarterly distributions, providing a steady income stream. Redemption is possible after 6 months, with caps of 2% quarterly and 5% annually, subject to fund availability and advisor discretion. The REIT’s impressive maximum offering is set at $1 billion, showcasing its scale and potential. Management charges are transparent at 1.25% of Net Asset Value (NAV), with a profit-sharing mechanism ensuring further transparency.

Sortis REIT focuses on acquiring stabilized or readily stabilized real estate assets, prioritizing off-market transactions. Deal sizes range from $2 million to $20 million to stay competitive. Supported by Sortis Holdings, Inc., they enhance acquisitions through curated retail experiences. Asset classes include multifamily, hotel, retail, office, light industrial, and life science properties.

Through thorough market analysis, the REIT’s approach, led by individuals with proven investment management expertise, identifies opportunities for strong risk-adjusted returns. Focused on the Western States, they capitalize on localized expertise. As a boutique-sized fund, Sortis REIT maintains flexibility in the market, avoiding forced investments. Their diverse relationships facilitate unique access to deals, and staff members’ personal investments align their interests with investors. Investing in REITs, whether public or private, offers a strategic investment opportunity in diversified real estate assets, including commercial property, allowing investors to optimize their portfolios for both stability and growth. Incorporating market analysis into investment strategies helps ensure more informed decision-making and potentially higher returns. Learn more about Sortis REIT here.

References:

[1] Tactica Real Estate Solutions. (2024). Public REITs vs. Private Real Estate Investment

https://www.tacticares.com/blog-feed/public-reits-vs-private-real-estate-investment

[2] Nareit. (2024). REITs by the Numbers

https://www.reit.com/data-research/data/reits-numbers

[3] Nareit. (2024). Global Real Estate Investment

https://www.reit.com/investing/global-real-estate-investment

[4] The Stock Dork. (2023). Private REIT vs Public REITs: Which One Is Better to Invest In?t https://www.thestockdork.com/private-reit-vs-public-reits/

[5] WealthManagement. (2015). Public vs. Private REITs

https://www.wealthmanagement.com/news/public-vs-private-reits

[6] Middlefield. (2023). COMPARING PUBLIC REITS TO PRIVATE REAL ESTATE FUNDS

https://middlefield.com/comparing-public-reits-to-private-real-estate-funds/

[7] Seeking Alpha. (2024). Private Vs. Public Real Estate: Which To Invest In And When

https://seekingalpha.com/article/4686004-private-versus-public-real-estate

[8] Nareit. (2024). Taxes & REIT Investment

https://www.reit.com/investing/investing-reits/taxes-reit-investment

[9] Realized. (2024). You Can 1031 Exchange Into A REIT, Here’s How

https://www.realized1031.com/blog/rolling-from-property-to-reit