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Private REITs vs Publicly Traded REITs

Learn the differences between the two types of REITs

What are Private REITs vs Publicly Traded REITs?

The article below covers private REITs vs publicly traded REITs. Real estate investment trusts (REITs) can be classified into either private or public, traded or non-traded. REITs specifically invest in the real estate sector, and they lease and collect rental income on the invested properties that is then distributed to shareholders as dividends.

 

Private REITs vs Publicly Traded REITs

 

The concept of REITs was introduced in the 1960s with the amendment to the Cigar Excise Tax Extension. The amendment allowed investors to diversify their portfolios by investing in real estate portfolios that earned incomes from different types of properties such as apartment complexes, hotel, office premises, warehouses, data centers, healthcare facilities as well as infrastructure (such as energy pipelines and fiber cables).

 

What Are Private REITs and How Do They Work?

Private REITs, also known as private placement REITs, are REITs that are exempted from registration with the Securities and Exchange Commission (SEC), pursuant to Regulation D of the Securities Act of 1933. It means that they are not regulated by the SEC, and their shares are not listed on public securities exchange markets such as the New York Stock Exchange (NYSE). Here are other characteristics of private REITs:

 

1. Availability of information

Since private REITs are not traded in stock markets, there is little to no public or independent performance data that investors can use to track the share price. Also, they are not regulated by the Securities and Exchange Commission, and hence, they are not required to file their annual financial statements with the federal agency. Only investors who have invested in private REITs can get performance information from internal sources.

 

2. Who can invest

The Securities Act of 1933 permits private REITs to sell securities to qualified institutional investors and accredited investors. Institutional investors are organizations that invest on behalf of their members and are assumed to have more specialized knowledge and, therefore, are able to protect themselves. They include pension funds, hedge funds, insurance companies, endowment funds, etc.

On the other hand, accredited investors are individual investors who are worth at least $1 million (excluding their primary residence), or have earned an annual income exceeding $200,000 over the previous two years.

 

3. Minimum investment

Private REITs offered to retail investors require a minimum initial investment of at least $10,000 to $100,000. However, the upfront cost requirements may vary from company to company.

 

4. Liquidity

Private REITs are not traded in public security exchanges, and are, therefore, not liquid. If an investor wants to pull out before a liquidation event, they must go through redemption programs for shares, which are either limited, non-existent, or subject to change. They differ from public REITs, which can be bought and sold with ease since they are traded on a public security exchange.

 

What are Public-Traded Reits and How Do They Work?

Publicly-traded REITs are regulated by the SEC, and they are traded in the major security exchanges. Individual investors can buy and sell shares of publicly-traded REITs on the public securities exchange such as the NYSE. Publicly traded REITs come with the following characteristics:

 

1. Availability of information

Since publicly traded REITs are traded in public securities exchanges, there is easy access to performance information about the shares of a public REIT. The information is provided by the company that owns and trades the REITs, as well as independent firms that actively analyze REITs. Also, REITs are registered and regulated by the SEC, which requires them to file their audited financial statements with the regulatory body. Interested investors can then access the information on the SEC website.

 

2. Who can invest

Individual and institutional investors can buy and sell shares of a publicly-traded REIT with a minimum investment of one share and the current share offering price. When buying through brokers, investors are charged an upfront fee, and the fee would be the as same as they would pay in any other public REIT.

 

3. Minimum investment

The minimum investment for a publicly-traded REIT is pretty modest, and the minimum investment for one share starts from $1,000 to about $2,500. However, the initial investment may vary from company to company.

 

4. Liquidity

Investors can easily buy and sell shares of a publicly traded REIT at a relatively low price since the REITs are traded on the major securities exchanges. Shareholders can readily get in and exit the marketplace effortlessly, compared to private REITs, which are less liquid.

 

Summary of Private vs Publicly Traded REITs

 

 Private REITsPublicly Traded REITs
Availability of InformationLittle to no public or independent performance data availableAudited financial statements filed with the SEC
Who can InvestQualified institutional investors and accredited investorsAny individual or institutional investor
Minimum InvestmentAt least $10,000 to $100,000Depends, usually $1,000 to about $2,500 per share
LiquidityIlliquidLiquid (shares can be easily bought and sold)

 

The decision of whether to invest in a private REIT or publicly-traded REIT depends on the investor’s goals and risk tolerance level. For example, an investor looking for a more liquid investment would go for a publicly traded REIT since they can buy and sell its shares with relative ease in the securities exchange.

However, if the investor’s goal is to invest in a REIT that is not affected by the volatility of the stock market, private REITs would be a preferred choice than publicly-traded REITs.

 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Absorption Rate
  • Asset Class
  • Cap Rate (REIT)
  • Residential Properties REITs

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