The Key Differences Between Public & Private REITs For Passive Investors

REITs can be a great way to expand or start a passive real estate portfolio, but understanding the key differences between public and private REITs is critical for an investor to know in order to be successful. Learn more about these key differences in our most recent blog post!

REITs (Real Estate Investment Trusts) are in plain english a huge portfolio of properties that investors can invest in, sometimes with very small investment amounts. What a REIT does is have all their investors contribute millions of dollars into an operating account, then they take the cash from that operating account and buy lots of properties with it.

Here are the key differences between public and private REITs:

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Private REITs

A private REIT is an investment in private real estate, which is slightly different than an investment in a public REIT (more on this below). Private REITs hold all the same benefits and disadvantages of owning private real estate, at a high level they are:

• Historically higher returns: Private REITs have been known to have greater returns than public REITs, ranging from 7-8% dividend payouts over 5-6% (source)

• Returns are based on the actual performance of the properties: You’ll see why this differs from public REITs in a bit, but your returns are based on how the actual property performs, since your investment is a true investment in real estate.

• Less liquid: Private REITs are less liquid than public REITs. Private REITs generally have minimum time requirements for your investment, and liquidation is usually subject to a board for approval. Depending on the market, this liquidation request can be denied. Liquidation request that are approved are also typically subject to penalties.

• Tax advantages: Private REITs are an investment in private real estate, and hold all the tax benefits of private real estate investments, such as depreciation. (We’re not CPAs, so please consult your appropriate tax advisor for more details)

Public REITs

A public REIT is an investment in the stock of a company that operates real property. This investment is an investment in truly an investment in the stock market and more specifically the stock of a company that operates just like a private REIT. Some key items to keep in mind are:

• Historically lower returns: As stated above, public REITs have historically paid out 5-6% dividends compared to 7-8% on average of private REITs (source)

• Returns are based on the stock market: It may seem contradictory, but there have been times where the stock price of a public REIT began falling even as the properties within that REIT were exceeding financial goals. Because this is an investment in the stock market, returns and values are more tied to the appetite of the market than the actual performance of the properties within the REIT.

• Completely liquid: Public REITs are stock shares, so they can be bought and sold at will without additional penalties imposed by the REIT.

• Tax advantages: Public REITs hold the tax advantages of investing in the stock market, not of investing in real estate.

As is the case with most investments, there isn’t a right or wrong strategy. A healthy passive portfolio contains a mixture of investments tailored to the individual investors goals.