Investing in Private REITs: Opportunities, Benefits, and Risks

Real Estate Investment Trusts (REITs) allow individuals to invest in income-generating real estate. REITs typically invest in diverse real estate assets, including multifamily housing, healthcare facilities, office buildings, and other commercial properties.

Compared to other asset classes, like stocks and bonds, REITs have delivered the average highest returns over the past decades. Private REITs, for example, can be appealing to accredited investors seeking diversification in real estate without the burdens of direct ownership, as well as those looking for specific tax advantages.

This investment vehicle falls into three categories: publicly traded REITs, publicly listed non-traded (PLNRs), and private REITs. Each type offers different benefits, varying levels of liquidity, and varied risk-return profiles. This article will briefly compare the types of REITs while exploring the benefits, risks, and strategies associated with investing in private REITs.

What Are Private REITs?

A private REIT is a company that allows investors to purchase shares in a company that owns and operates income-producing real estate. The private REIT owns, operates, and maintains its properties, generating rental income from tenants, which is then distributed to investors as dividends. When a property appreciates in value, private REITs may sell it and share the proceeds with their shareholders.

Unlike publicly traded REITs, private REITs are exempt from many of the Securities and Exchange Commission’s (SEC) regulations that govern public REITs, making them less accessible to the general public. They are not listed on stock exchanges and are primarily available to accredited investors and institutional investors.

This makes private REIT investing more specialized, catering to high-net-worth individuals. Private REITs are usually advised by management groups that buy, finance, and operate income-producing real estate.

Private REITs vs. Publicly Traded REITs

Interested in expanding your real estate portfolio but unsure where to start? Consider the differences and similarities between private and publicly traded REITs.

	Private REITs	Publicly Traded REITs
Liquidity	Private REITs, similar to PLNRs, tend to be illiquid investments. There isn’t a secondary market for exchanging private REIT shares for cash, and strict holding requirements typically start at five years or more, meaning investors must undergo a redemption program for shares.	Publicly traded REITs are highly liquid. Shares are listed and traded on major stock exchanges.
Accessibility	Private REITs are accessible to accredited investors, meaning there are several requirements, including an individual or spousal net worth over $1 million, excluding primary residence.	Publicly traded REITs generally don’t have specific income or net worth requirements.
Transparency	Private REITs generally have less transparency requirements. Investors may not receive regular or comprehensive information on the properties owned.	Publicly traded REITs are subject to similar regulations of financial disclosures that apply to bonds and listed stocks, including quarterly earnings reports. The market price of a publicly traded REIT is readily accessible.
Volatility	Private REITs are considered less volatile than publicly traded REITs.	Publicly traded REITs correlate closely with stock market fluctuations, subjecting them to price swings based on broader market conditions.
Minimum Investment	Minimum investment will vary, but since private REITs are designed for institutional or accredited investors, investors can expect a higher cost to invest.	You can invest in publicly traded REITs, similar to stocks, by purchasing any number of shares, subject to your brokerage’s requirements and the REIT’s share price.

While private REITs can offer the opportunity for higher returns than publicly traded REITs, this potential is often accompanied by increased risk and illiquidity, making them an investment to consider carefully.

How Do Private REITs Work?

Investors buy shares in a private REIT, which owns and manages income-producing real estate. The REIT earns income from rent and property appreciation, then distributes profits to investors through dividends or capital gains.

Private REITs typically invest in real estate like multifamily housing, industrial properties, and healthcare facilities. Private REITs may focus heavily on specific sectors, project types, or geographic regions, aligning with a defined investment philosophy of high-value investing.

Key Advantages of Investing in Private REITs

These are the advantages of private REIT real estate investing.

Diversification: Gain access to high-quality, institutional-grade real estate without direct ownership
Lower Volatility: Private REITs are typically valued less frequently (sometimes quarterly) as opposed to daily, which is why share price can be less volatile than public REITs.
Potentially Higher Returns: Often focus on value-add or opportunistic investments with higher yield potential
Professional Management: Properties are managed by experienced teams, relieving investors of operational responsibilities

Potential Risks of Private REITs

Building wealth through real estate investment requires an understanding of the potential risks.

Illiquidity: Limited redemption options and long holding periods.
Lack of Transparency: Fewer regulatory requirements and less frequent reporting can limit insight into performance
High Fees: Management and administrative fees can impact overall returns
Market Dependency: Though less volatile than public REITs, private REITs are still influenced by real estate market cycles and economic conditions

Who Should Consider Private REITs?

The ideal private REIT investor is:

An accredited investor with a long-term investment horizon,
Individuals seeking passive income without direct property management responsibilities,
And investors looking to diversify their portfolios with alternative assets.

Minimum investment requirements may be in the tens of thousands of dollars, but for investors looking for durable passive cash flow and long-term wealth accumulation through appreciation, private REITs may be an ideal investment vehicle.

Tax Implications of Private REITs

Private REIT investors continue to enjoy the typical tax benefits associated with REITs. As with all REIT dividends, income from private REITs is reported on IRS Form 1099-DIV, with most dividends taxed as ordinary income at the investor’s individual tax rate.

Depreciation is one of the most valuable tax advantages in real estate, and since private REITs are structured as LLCs, they can pass this benefit directly to investors. This allows you to reduce your taxable income. Additionally, since private REITs generally have limited liquidity and are not required to follow the same public reporting standards as publicly traded REITs, they can streamline tax reporting and minimize the occurrence of valuation-related tax events.

Private REITs may also have estate tax benefits, helping to reduce the tax burden on an investor’s estate. This can enable a more tax-efficient transfer of wealth to future generations.

How to Evaluate a Private REIT

The first step in evaluating a private REIT is researching a sponsor’s reputation. The sponsor is the entity that establishes the real estate investment trust and contributes its properties to the trust. The sponsor is also responsible for selecting the REIT’s trustee. Doing your due diligence and knowing their track record is key.

Next, access the property portfolio, including the quality, location, and diversity of the real estate assets, and the fee structure, including the upfront, management, and exit fees, to the best of your ability.

Finally, evaluate performance metrics, if possible. Indicators include occupancy rates, dividend history, and growth potential, but these metrics might not be available since REITs are not obligated to show you the specific properties in the portfolio.

Is a Private REIT Right for Your Investment Strategy?

Private REITs can be a powerful tool for real estate investors seeking diversification, potential tax advantages, and passive income opportunities. These investment vehicles offer benefits like depreciation pass-throughs, but they also come with risks.

Before investing in a private REIT, conducting thorough due diligence is essential. Investors should carefully evaluate the REIT’s structure and consult with professionals to ensure alignment with long-term financial goals.

At 1031 Crowdfunding, we specialize in supporting investor access to diversified and tax-efficient real estate opportunities. Our platform offers a curated selection of real estate investment options designed to support wealth preservation and growth strategies.

If you’re considering a private REIT as part of your investment portfolio, register to get started, and let us help you navigate real estate investing with confidence.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC