How to Invest in a Private REIT

Private real estate investment trusts (REITs) can allow investors to diversify their portfolios with real estate assets. Potential benefits include reduced market volatility and an additional layer of privacy as they aren’t traded on stock exchanges or registered with the SEC. However, to invest in a private REIT, you generally need to be an accredited investor, which means complying with specific income and net worth requirements. Accredited investors should conduct thorough due diligence, understand investment terms and assess the management team’s experience before committing funds to a private REIT.

If you're interested in building a real estate portfolio, a financial advisor can help you analyze investments and manage them.

What Are Private REITs?

Private real estate investment trusts (REITs) are investment vehicles that own, operate, or finance income-generating real estate . Unlike their publicly traded counterparts, private REITs are not listed on major stock exchanges, making them less accessible to the general public. They are typically structured to pool capital from investors to acquire and manage real estate assets , providing a way to invest in real estate without directly buying property.

Private REITs are usually exclusive to accredited investors or institutions, meaning that individuals must meet certain income or net worth thresholds to participate. In order to be classified as an accredited investor, you must satisfy one of the following conditions:

• Wealth and income: Have a net worth of over $1 million, either individually or with a spouse or partner, excluding their primary residence. They must also have earned an income of over $200,000 individually or $300,000 with a spouse or partner in each of the past two years, and reasonably expect to earn the same during the current year.
• Credentials: Have certain credentials, certifications, or designations recognized by Financial Industry Regulatory Authority (FINRA) . For example, financial professionals who hold a securities representative license (Series 7), an investment advisor representative license (Series 65), or private securities offerings representative license (Series 82) in good standing may qualify.
• Financial sophistication: Have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a prospective investment.

In addition to individuals, institutional investors such as banks, insurance companies and investment firms can also qualify to invest in private REITs. These entities typically have large amounts of capital and are experienced in managing complex investments, aligning with the requirements of private REITs and familiar with the associated risks.

You should note that while private REITs can potentially offer higher returns by investing in specialized or niche real estate sectors, this flexibility comes with trade-offs. As a result, investors could take on higher risk, and face reduced transparency and longer investment horizons . Therefore, you should carefully research the private REIT before investing.

Private REITs vs. Publicly Traded REITs

Private real estate investment trusts (REITs) and publicly traded REITs differ in several ways. Here are three things investors should make note of:

• Regulation: Private REITs are not regulated by the Securities and Exchange Commission (SEC) and are not required to register with the SEC. Publicly traded REITs are regulated by the SEC and traded on major security exchanges.
• Liquidity: Private REITs are less liquid than publicly traded REITs. Publicly traded REITs are traded on stock exchanges, which provides investors with liquidity and the ability to react quickly to market conditions. Private REITs are not traded on national securities exchanges and are primarily sold by broker-dealers.
• Investment minimums: Private REITs typically have high investment minimums , often as much as $50,000 or $100,000. Publicly traded REITs have no minimum investment requirement.

The most significant difference between private and publicly traded REITs lies in their accessibility and liquidity . Because publicly traded REITs are bought and sold like stocks, they offer daily liquidity and price transparency. Investors can easily enter or exit positions, making them more suitable for those seeking flexibility and immediate access to funds.

Private REITs, by contrast, often have lock-up periods, restricting investors from accessing their capital quickly. This illiquidity can be a disadvantage for some but is also a trade-off for potentially higher returns.

Private REITs vs. Non-Traded REITs

Non-traded REITs, also known as non-listed REITs, share some similarities with private REITs. Both types are not traded on major exchanges, and both target more sophisticated investors.

However, non-traded REITs are registered with the Securities and Exchange Commission (SEC) and are subject to some regulatory oversight, whereas private REITs operate with less transparency and fewer reporting requirements. This can lead to differences in management strategies, fee structures, and risk profiles.

How to Invest in a Private REIT

Investing in a private REIT will involve several key steps that require your attention. Here are six general steps to keep in mind:

1. Become accredited. While it's up to the private REIT to do their due diligence in determining whether you qualify as an accredited investor or not, they will make that decision based on the criteria outlined above.

2. Research available options. Conduct thorough research to identify private REITs that align with your investment goals. This includes evaluating the type of properties within the REIT, geographical focus, management team expertise and potential for returns. Review the private REIT’s offering memorandum, which details the investment strategy , risks, fees and other important information.

3. Access the investment. To access a private REIT, you’ll typically need to work through a financial advisor, brokerage firm or directly with the REIT's management company. Networking with industry professionals or using platforms that specialize in alternative investments can provide valuable connections and insights into available opportunities.

4. Conduct due diligence. Perform comprehensive due diligence to understand the private REIT’s track record, management team and underlying assets. This may involve reviewing past performance, financial statements and legal documents to ensure the investment is sound.

5. Make the investment. Once you’ve selected a suitable private REIT, complete the necessary paperwork and fund your investment. Be prepared for potential lock-up periods, which may restrict access to your capital for several years.

6. Monitor performance. After investing, regularly monitor the private REIT's performance. Stay informed about changes in the real estate market and the REIT's portfolio to assess whether the investment continues to align with your financial goals .

Pros and Cons of Investing in Private REITs

Comparing private REITs vs. public REITs , and other types of REITs, can help you determine the best options for your real estate portfolio.

Pros

• Potential for higher returns: Private REITs often target specialized real estate markets and strategies that can offer higher returns than publicly traded REITs, albeit with more risk.
• Diversification: Private REITs provide access to a wide range of real estate assets, helping investors diversify their portfolios and reduce exposure to traditional market volatility.
• Tax benefits: Some private REITs offer tax-efficient distributions, allowing investors to potentially benefit from lower tax rates on certain income types.
• Stability: Private REITs are not subject to daily market fluctuations, offering reduced market volatility during downturns.

Cons

• Limited liquidity: Private REITs often have long lock-up periods, making it difficult to access invested capital quickly.
• Higher risk: With less regulatory oversight, these investments can carry more risk and require a greater level of due diligence.
• Complex fee structures: Fees can be higher and more complex than those associated with publicly traded REITs, potentially impacting overall returns.
• Accredited investor requirements: Access to private REITs is restricted to accredited investors
• No control over investment: Just as if you were to invest in a mutual fund, you don’t have any say in how a REIT invests its money or the properties themselves. As a result, some REITs focus on more specific niches, such as office buildings or apartment complexes, making diversification important.

Bottom Line

Private REITs can help diversify your portfolio, potentially achieve higher yields and allow you to gain access to specialized real estate markets. But they also come with challenges like limited liquidity and complex fee structures. While investors who meet the eligibility criteria can benefit from private REITs, they should do careful research to understand the risks, fees and potential rewards so that they can make informed decisions and maximize their investment outcomes.

Real Estate Investing Tips

• A financial advisor could help you create a personalized investment portfolio based on your goals and needs. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• If you want to calculate how much an investment can earn over time, SmartAsset's free investment calculator can help you get an estimate.

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