While most investors in real estate investment trusts (REITs) acquire their shares in publicly traded markets, there exists another type of REIT that isn’t open to mainstream retail investors, nor are they subject to the same regulatory requirements as publicly traded REITs. This beginner’s guide to private REITs will look at their pros and cons, delve into their functioning and help investors decide if investing in a private REIT is worthwhile.
Real estate investment trusts own or finance a wide range of income properties, both residential and commercial. They operate in a similar fashion to mutual funds, in that investor money is pooled to provide retail investors of average net worth the opportunity to profit from real estate investments. This provides them with the potential to benefit from real estate investments earning dividend-based income and returns, without the concerns of traditional landlords.
Shareholders receive a percentage of the income the properties generate commensurate with the amount of their investment. To qualify as a real estate investment trust, a company is required to invest 75% or more of its assets in real estate. Further, at least 75% of its gross income must be derived from rent payments, mortgage interest, or selling properties.
REITs must also be taxable corporate entities and pay out at least 90% of their taxable income to shareholders — most pay out 100%. In turn, shareholders pay income taxes on those dividends. Public REITs are required to be governed by a board of directors and have at least 100 shareholders. And, at least 95 of those 100 shareholders must hold at least 50% of those shares combined.
There are four types of REITs: publicly traded equity REITs, mortgage REITs, public non-listed REITs and the subject of this article, private REITs.
Publicly traded equity trusts, as the name implies, are open to any investor and their shares trade on the major exchanges. They function like any other publicly traded equity investment and must conform to SEC regulations.
Mortgage REITs finance income-producing real estate, either by providing mortgages or buying mortgage-backed securities. Their earnings are generated from interest payments on those loans.
While public non-listed REITs are also open to any investor, their shares are not listed on the exchanges. While these are also subject to SEC regulations, they are typically crowdfunded, which is how Yieldstreet’s Growth & Income REIT operates. These REITs function as sort of a hybrid of publicly traded and private trusts. While they are required to meet SEC regulations, they are not readily traded. This is how Yieldstreet’s Growth REIT, which is not listed on any public market, operates.
Private REITs are not listed on exchanges, nor are they required to meet many of the SEC’s investor protection requirements applicable to public REITs. These investment opportunities are generally made available to accredited and institutional investors through brokerage houses.
Private REITs typically offer higher dividends than publicly traded ones. According to data provided by National Real Estate Investor, private REIT dividend yields have traditionally been in the 7% to 8% range, while public trusts have returned between 5% and 6%.
Share prices are calculated on a quarterly basis, so their value tends to be more stable than publicly traded trusts, whose share prices are calculated on a daily basis. This relieves private investors of many of the volatility concerns with which public investors must contend.
Less SEC oversight means lower compliance costs. The regular financial reporting and corporate governance rules with which public trusts must comply do not apply to private trusts. Meeting those regulations can generate considerable cost. This gives private trusts the advantage of producing potentially higher risk-adjusted returns, as compared to their public counterparts.
Less regulation can also mean less transparency. Private REITs are exempt from SEC registration and regulation. This is one of the reasons this asset class has traditionally been open only to more experienced, high net worth investors and institutions.
Illiquidity can be another issue of which to be aware. Once an investor has committed to a private REIT, liquidating that investment can be difficult. Publicly traded REIT shares can be sold any time the exchange on which they are listed is open. Private REITs are often much more restrictive about the selling of shares, in an effort to preserve their value.
The commission structure can occasionally be unfavorable to investors as well. Because private REITs are sold by brokers rather than offered on an exchange, investors will encounter higher commissions. In some cases, these can be up to 12%. While this is a rare occurrence, it does make sense to pay attention to the fee structure.
Given that rather lengthy list of cons, the risks would appear to outweigh the potential for rewards. However, it is important to note that private REITs have the potential to be superior investment opportunities when compared to their publicly traded equivalents. The best advice in that regard is to conduct thorough due diligence before committing to one of these opportunities.
The SEC will not be there to provide a safety net, nor will any other regulatory agency. This places the onus squarely on the shoulders of the investor. Those with the time, expertise and drive to succeed in this asset class do stand to earn more profits than they would in public , or public, non-traded REITs. However, there does exist a more carefully vetted opportunity in real estate for retail investors.
Real estate investing in general is numbered among asset classes designated as “alternative investments.” While they are hard to define, broadly speaking, alternative investments tend to be less correlated with public equity, and thus offer the potential for diversification. These assets were traditionally accessible to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums – often between $500,000 and $1 million.
However, Yieldstreet was founded with the goal of dramatically improving access to these alternative assets by making them available to a wider range of investors. While traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation, a more balanced 60/20/20 or 50/30/20 split incorporating alternatives holds the potential to render a portfolio less sensitive to public market short-term swings. Yieldstreet offers a variety of real estate investing opportunities of this nature in some of the most appealing markets in the country, including a Growth REIT, which is a public, non-traded REIT allowing investors an opportunity to invest beyond the stock market.
There does exist an opportunity to realize significant gains with private REITs. However, barriers to entry can be high and a great deal of experience is recommended before engaging in an investment of this type.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.