3 Advantages & 5 Disadvantages of Investing in a Private REIT

By Chika


Last Updated: November 20, 2021


For investors looking for investments with steady dividends, REITs are a good choice. 

Though the majority of REITs are traded on the stock exchange, not all REITs are publicly traded.

Private REITs fly below the radar of most investors because they are not open to everyone. They often pay higher dividend yields than their publicly listed peers. Plus their reduced transaction costs may result in higher returns. 

However, investing in this asset class also comes with some disadvantages you should be aware of before committing your funds.


What is a Private REIT?

Private REITs are real estate investment trusts that are not traded on a major exchange. They are exempt from most SEC regulations.

They are often marketed to accredited and institutional investors through brokers. Private REITs are different from public non-listed REITs (such as real estate crowdfunding platforms), which pool funds from the public but are not listed in an exchange.

Private REITs pool funds from a select class of investors and are not traded publicly. 


3 Advantages of Investing in Private REITs

1. High Dividend yields

Private REITs often pay larger dividends than similar public REITs. According to National Real Estate Investor, public REIT dividend rates have traditionally been between 5% and 6%. On the other hand, private REIT dividend yields have been in the 7 percent to 8% range.

2. Less volatility 

Investors don't have to worry about daily market swings, because private REITs only compute their share values every quarter.

Since they are not publicly traded, this means the trading volume would be thinner and volatility lower. If you are worried about the effect of drawdowns and volatility of public listed REITs, the rare pricing changes of private REITs may be appealing to you.

3. Low-cost compliance

Regular financial reporting and corporate governance regulations are needed of public REITs, and this can be costly.

Private REITs can save substantial money in this area since they are subject to limited regulatory restrictions, and they can (theoretically) provide greater risk-adjusted returns when compared to their publicly listed counterparts.


5 Disadvantages of Investing in Private REITs

1. Lack of transparency

Private REITs are not subject to the same regulatory scrutiny as public REITs. This may give fund managers leeway to make choices that aren't always in the best interests of shareholders. Conflicts of interest, for example, do not have to be declared by private REIT sponsors.

 2.Only accredited investors are eligible to participate

Private REITs are only available to authorized investors due to:

  • greater risks
  • the potential for investor abuse
  • the lack of a liquid market

This usually implies they're only available to institutional investors with at least $1 million in assets or $200,000 in yearly income.

3. Lack of liquidity 

Since private REITs are not open to all investors, the trading volume on this asset class is low, which leads to low liquidity.

When it comes to stock redemption, each corporation has its own set of restrictions, which can be rather stringent. Some trusts demand a holding period before an investor is allowed to sell their shares. As such, it might be tough to cash out once you've invested. 

4. High commissions 

Because brokers offer private REITs to consumers, management fees may consume a considerable portion of your private REIT investment.

In fact, it has been stated that private REITs spend up to 12% of their revenue on marketing and fees. This implies that if you invest $10,000 in a private REIT, you could only get $8,800 back.

5. High minimum investments

Depending on the organization, the minimum investment in a private REIT might range from $1,000 to $25,000 (or more in some cases). A publicly traded REIT can be acquired for as little as one share. Also, many publicly traded non-listed REITs have similar low entry requirements.

Read this next for more info on REITs: Investing in the Real Estate Investment Trust: Top 5 Benefits & 5 Demerits


Should You Invest in Private REITs?

Investing in private REITs has a lot of drawbacks that outweigh the possible benefits. Investors are hit with a slew of transaction expenses that are masked as management fees. A big setback is also the absence of apparent illiquidity and complete transparency. 

Some investors may be trading on privileged information, so does not level the playing field for investors. The SEC and other regulatory authorities will not protect you if the investment goes sideways.

If you have the time, education, and determination to correctly examine private REIT investment chances on your own, you can find a diamond in the rough. If that's the case, you're better off sticking with publicly-traded REITs, which pay high dividends and offer lots of development potential without the headaches.

Photo by Anna Nekrashevich from Pexels


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