Private real estate funds and real estate investment trusts are both ways that you can invest in real estate without actually buying properties. Both types of investments collect money from investors and use it to buy real estate. They then pass the gains and losses from the real estate back to the people who invest in them. Both types of investments can be structured as REITs, but there is a key difference between them. Public REITs are traded on the stock market and are extremely liquid, like any other share of stock, while private REITs aren't.
Requirements and Eligibility
You can buy shares in a public REIT like you would any stock. All that you need is a brokerage account and enough money to buy your desired amount. It's possible to buy as little as one share at a time, although transaction costs might make this an unwise strategy. Private real estate funds, on the other hand, can set their own minimum investment requirements, and they could be sizable. Because they are not registered with the Securities and Exchange Commission, you might not be able to buy them unless you're an "accredited investor," which means that you either have a lot of money in your investment accounts or a very healthy salary. As of the date of publication, you need to have either $1 million in net worth (excluding your house) or an annual salary for $200,000, or $300,000 if you file jointly, for the past two years.
Public REITs are publicly traded, so you can buy and sell them whenever and however you want. Private real estate funds are generally less liquid. Bear in mind that in a private fund, the money that gets raised is usually directly invested in properties, while public REITs are just shares that you buy. Because the private funds aren't publicly traded, and the money is tied up in properties, it's challenging to get the money out of the fund.
Because public REITs are publicly traded, they're subject to the same stock exchange and SEC requirements as any other publicly traded companies. They have to make annual and quarterly releases of audited financial data to meet SEC requirements. Stock exchanges like the New York and NASDAQ require them to also have independent audit committees to ensure that the information released is accurate. If the company's disclosures aren't enough, third-party analysts also provide information on the performance and comparative value of publicly traded REITs. None of these exist for private real estate funds.
Most REITs stick to large properties in their sector and geography of expertise. When you buy shares of "Big Office REIT," you probably won't find retail centers in its portfolio. Furthermore, REITs get their money from the public markets primarily. Private funds, on the other hand, can be more nimble and can invest in different properties. They also frequently use leverage, which can increase carrying costs but also gives them to opportunity to increase the returns they deliver to their investors.
When they're well-managed, private real estate funds should be able to outperform REITs. Much of their fund managers' income comes from their carried interest -- which is an investment in the fund's assets, giving them good alignment with their investors. Furthermore, private funds benefit from leverage and don't have to deal with regulations or with limitations on what they can own. Because they aren't publicly traded, private REITs also tend to be less volatile and to perform more like real estate and less like stocks. On the other hand, private REITs that are not well managed can lead to significant losses for investors.
- Delaware Investments: Know Your REITs -- Private versus Public REITs
- U.S. Securities and Exchange Commission: Accredited Investors
- J.P. Morgan: Building Portfolios with Real Estate: Relevant Issues and Current Environment
- Commercial Property Executive: REITs Versus Real Estate Private Equity Funds: Who Wins?
- Forbes: Private REITs Backfire on Investors
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