With global equity markets remaining volatile due to concerns about U.S. economic growth, real estate investment trusts (REITs) have become a popular choice for investors who value cash flow.
REITs are alternative investment vehicles where investors pool money to buy and manage income-producing real estate. REITs typically invest in a range of income-producing real estate assets, such as multifamily and healthcare properties, office buildings, and residential and other commercial real estate properties. Compared with bonds, REITs have historically offered higher yields and potential for capital appreciation.
REITs have three classifications: publicly traded, publicly listed non-traded (PLNRs), or private. Each classification has its own set of unique benefits, liquidity, and risk-to-return tradeoffs. In addition to classifications, there are three different REIT types: equity REITs, mortgage REITs, and hybrid REITs.
This article evaluates the different REIT classifications and types, highlighting their unique features. Understanding the types of REITs can help investors make informed decisions that align with their financial goals.
Publicly Traded REITs
Publicly traded REITs are a popular investment vehicle that allows investors to gain exposure to commercial real estate assets without the need to own physical properties directly. Publicly traded REITs are listed on public exchanges, such as the New York Stock Exchange (NYSE), making them accessible to a broad range of investors without specific eligibility requirements. When investing in a publicly traded REIT, individuals can purchase shares through a broker just like any other stock, mutual fund, or exchange-traded security (ETF).
Key Features:
- Liquidity: Publicly traded REITs are listed through national securities exchanges, making them highly liquid. Most large REITs see tens or hundreds of thousands of shares changing hands on the stock exchange during trading hours.
- Market Volatility: Although publicly traded REIT values are easily accessible, they tend to correlate closely with stock market fluctuations. This makes them subject to potential price swings based on broader market conditions. As a result, publicly traded REITs are valued more frequently, often daily, unlike private REITs, which may be valued annually.
- Transparency: Publicly traded REITs must be registered with and are regulated by the SEC (Securities and Exchange Commission). They are subject to similar rules and regulations of financial disclosures that apply to bonds and listed stocks, including annual and quarterly reports.
Benefits:
- Liquidity
- Open to non-accredited investors
- Easy access to REIT prices and reports
Risks:
- Can be more volatile due to investor redemptions
- Potential for lower returns due to higher ongoing expenses for reporting
Non-Traded REITs
Non-traded REIT investments, also known as PNLRs (public non-listed REITs) are a hybrid between private and publicly traded REITs since they allow retail investors to invest in real estate without the price volatility of market forces.
Due to greater regulatory oversight, non-traded REITs are accessible to non-accredited investors through private placements and financial advisors. These REITs can be purchased through specialized brokers and typically have investment minimums as low as $1,000-$2,500.
Key Features:
- Liquidity: Non-traded REITs are less liquid than publicly traded REITs. However, depending on the REIT’s share redemption plan, investors may be able to redeem their shares after a minimum holding period.
- Valuation: Non-traded REITs’ share prices are not directly affected by stock market volatility because they don’t trade on national stock exchanges. The valuation of non-traded REITs is determined through appraisals and periodic assessments conducted by the REIT rather than daily market pricing. This could lead to less frequent and potentially less transparent valuation.
- Transparency: Non-traded REITs are required to register with and be regulated by the SEC. These REITs regularly disclose financial reports that are audited by approved accountancy firms.
- Income and Stability: Non-traded REITs often emphasize income generation and stability, focusing on long-term investments in income-producing properties. Longer holding periods and control over the redemption process give the REIT’s management team flexibility to execute a long-term strategy without having to reserve cash for redemptions.
Advantages:
- Passive income potential
- Less correlated with the general stock market
- Diversification
Disadvantages:
- Limited liquidity
- Less transparency
Private REITs
Private Real Estate Investment Trusts (REITs) cater primarily to accredited and high-net-worth investors. They are not listed on public exchanges and are exempt from many of the SEC regulations that apply to public REITs, limiting their accessibility to the general public.
They are typically structured to raise capital through private placements and are often sold via broker-dealers, with the possibility of high management fees and commissions.
Key Features:
- Liquidity and Valuation: Like non-traded REITs, private REITs also tend to be illiquid investments. There is no secondary market where you can exchange private REIT shares for cash. Moreover, they have strict holding requirements, ranging up to five or more years. If investors want to cash out before a liquidation event, they must go through a redemption program for shares, which varies by REIT.
- Market Correlation: Private REITs generally have a low correlation to public market fluctuations, with their value based on the appraised worth of underlying assets, making them less volatile. However, they can still be affected by broader economic trends.
- Higher Dividends: Private REITs generally pay higher dividend yields compared to public REITs, making them an attractive option for income-focused investors.
- Simple Tax Treatment: Private REIT investors still benefit from the general tax advantages of REITs. Like all REIT dividends, income from private REITs is reported on IRS Form 1099-DIV, and most dividends are taxed at the investor’s individual tax rate as ordinary income. However, private REITs often have limited liquidity and are not subject to the same public reporting requirements as publicly traded REITs, which can simplify tax reporting and reduce the frequency of valuation-related tax events.
- Control over Redemption: The REIT’s management team has more control over redemptions, allowing them to prioritize long-term strategies over short-term liquidity needs.
Advantages:
- Low correlation to market fluctuations
- Potentially higher dividend yields
- Tax advantages
- Generally higher dividends compared to publicly traded REITs
Disadvantages:
- Illiquidity
- Less transparency
- No regulatory oversight
Comparing the REIT Types
Investors need to consider their risk tolerance and investment objectives when selecting a REIT type. Each type may not be suitable for every situation or investor profile. Below is a side-by-side comparison of publicly traded, non-traded, and private REITs to clarify their key differences and help you decide which is best for you.
Investment Goals:
- Publicly Traded REITs are easily accessible and provide investors with flexibility and liquidity, as they can be bought and sold on major exchanges. With typically lower minimum investment amounts, publicly traded REITs allow investors to integrate them into existing portfolios easily, making them suitable for those who prioritize accessibility and shorter time horizons.
- Non-traded REITs may suit investors looking for steady income and stability from potentially higher-quality investments. Non-traded REIT managers focus on long-term investment in real estate markets.
- Private REITs often attract those looking for higher-return investments with a longer investment horizon.
Risk and Return Profiles:
- Publicly traded REITs are listed on major stock exchanges and can be influenced by market valuation swings, making them more susceptible to short-term volatility, similar to stocks. Factors such as investor sentiment, interest rate changes, and overall market conditions can cause fluctuations in share price, often unrelated to the performance of the underlying real estate assets. However, the trade-off for this higher volatility is the potential for capital appreciation, as publicly traded REITs may experience value growth over time.
- Non-traded REITs are not listed on public exchanges, which generally results in lower short-term volatility compared to publicly traded REITs. Because they are less subject to daily market fluctuations, non-traded REITs may offer more stable income potential, often through regular dividend distributions. However, non-traded REITs typically have lower liquidity and often require longer holding periods, meaning investors may not access their invested capital as quickly.
- Private REITs could involve significant risk due to a lack of transparency and limited regulatory oversight, and they often pursue more concentrated investment strategies. Unlike publicly traded REITs, which tend to have broader, more diversified portfolios, private REITs may focus heavily on specific sectors, geographic regions, or project types, aligning closely with a defined investment philosophy.
Liquidity Considerations:
- Publicly traded REITs are highly liquid. These shares can be exchanged for money at any time during trading hours.
- Non-traded REITs have limited liquidity, with redemption schedules and caps typically set by the trustee or sponsor, making share redemption challenging and often restricted to specific periods.
- Private REITs are generally illiquid investments and have trustee or sponsor-determined redemption plans, usually offering limited windows for redemptions, suited for long-term investors.
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Publicly traded REITs offer liquidity, regulatory oversight, and income potential, making them an attractive option for investors looking for diversification with alternative investments. While less liquid, non-traded REITs tend to experience lower short-term volatility and grant investors access to unique real estate assets not always available through publicly traded REITs. Private REITs carry illiquidity risks and low transparency but can be ideal for accredited investors looking for higher-return investments than those available to the general public.
Making well-informed investment decisions begins with aligning your strategy to your financial goals. Whether your focus is growth, liquidity, or balance, tailoring your REIT investments can enhance your portfolio’s performance.
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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, 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.
