REIT vs Private Equity Real Estate – Which One Is Better?
April 15, 2023
This is a common question we receive from potential investors quite often. As you may have heard or read many times before, “It Depends”. REITs and Private Equity investments in the commercial real estate space have advantages and disadvantages. What may be seen as an advantage for a REIT is in many cases a disadvantage for a private equity investment, and the same example can apply when reversed.
Due to REITs being frequently listed and traded publicly, you’ll find many times that they have higher liquidity. When investing into private real estate, you’ll find that many brokers, dealers, firms and funds require much higher minimums, plus they like to only approve accredited investors, high net worth individuals or VHNWI’s. Different from private real estate investments, a public REIT has a much lower minimum investment.
Another big difference when considering a REIT vs Private Equity Real Estates is that a REIT is priced on a daily basis (similar to a stock) which means they have a high correlation to the stock market. Private real estate, in most cases, has very little correlation to the ups and downs of the public stock market.
We’ve opened this article with a few distinctions between a REIT vs Private Equity investment so the question for you as an investor becomes which one is better for your portfolio? Here we’ll go deeper into a few of those differentiators to help you decide.
REIT Investments are Correlated to the Stock Market
Because REITs are frequently publicly listed, they can be more liquid. Private real estate typically has substantially higher investment minimums and is normally only available to approved individuals. This is because there are fewer people participating per project. REITs often have a low investment threshold. They are also priced on a daily basis, exactly like stocks, and so have a high correlation to the stock market.
Private real estate, on the other hand, often has a minimal correlation to the public stock market because private market investments are traded at a far lower frequency, meaning there are far fewer changes to their real values. Typically, public stock markets do not generate as large a shift in the value of such real estate.
Due to the possible volatility of public REITs, private real estate investing, particularly through a business that provides true diversification through a fund-type structure, can be an excellent way to diversify your portfolio with various investments that have little correlation to the public markets. Diversifying your investments into non-correlated account types can hedge your traditional investments in the event of market changes. Private real estate can be one of such non-correlated, a typical investment account kinds.
REIT Investment Liquidation Comes at a Cost
The option to liquidate the investment, i.e. cash out, is the second fundamental difference between REITs and private real estate investments. Private real estate is a very illiquid investment, which means that generating significant returns might take time. Usually, you won’t be able to sell it at market value the next day; it may take some time to sell and achieve the desired returns. Because REITs are publicly traded, they work similarly to the stock market; if you want to get your money back tomorrow, you can usually do so. It may be at a loss (based on the value of the shares you purchased in the trust), but when you buy in a REIT, you can get cash out immediately.
On the contrary, there is a “liquidity penalty” to being able to withdraw your investment rapidly. Private real estate investors often invest their money for a lengthy period of time without having access to it. If you need money by a certain date, you won’t be able to access the money you’ve invested in real estate. As a result of this “illiquidity cost,” you’ll often experience higher profits from private real estate.
Real Estate Investment Trust Investing is Public
REITs, as previously said, are often publicly traded. You often have greater influence over what you invest in when you invest in private real estate (particularly if you choose to invest all in one property).
Private real estate investment firms can be choosy, patient, and look for opportunities across numerous asset classes and geographies to maximize returns. They are not banned from investing in assets that require additional effort, have an efficiency or vacancy issue, and hence have the potential to provide exponentially larger returns than a REIT or the public markets.
As a result, REITs may be regarded as a less hazardous investment by certain investors because they often invest in properties that are already of excellent quality and do not require much work; nevertheless, the returns may be lower as a result.
We only recommend private real estate as an investment if you can afford the illiquidity. REITs can be a better fit for your overall portfolio if you can’t afford private real estate illiquidity. However, if you are interested in longer investments and higher returns, we want to talk. Download our investment summary here.