REITs vs Private Equity: Which Passive Real Estate Investment is Right for You?

CEO Khai Intela
Real estate has always been a lucrative investment, but the methods of investing in it have evolved over time. Gone are the days of manual labor and hands-on management. Today, passive real estate investments are...

REITs vs Private Equity

Real estate has always been a lucrative investment, but the methods of investing in it have evolved over time. Gone are the days of manual labor and hands-on management. Today, passive real estate investments are gaining popularity and accessibility. However, with the multitude of options available, it can be challenging to determine which avenue is suitable for you.

In this article, we will explore two of the most popular passive real estate investment options: Real Estate Investment Trusts (REITs) and Private Equity. By understanding the distinctions between these two options, you can make an informed decision that aligns with your investment goals.

Real Estate Investment Trust (REIT)

A REIT is a corporation, trust, or association that directly invests in income-producing real estate and is traded like a stock. It offers an opportunity to own a stake in a diversified portfolio of properties without the hassle of property management.

Private Equity

Private Equity investments involve pooling funds from various sources, such as individuals and family offices, to acquire properties or portfolios. These investments are typically held in a Special Purpose LLC and offer direct ownership in physical real estate.

Now, let's delve into the key factors to consider when deciding between REITs and Private Equity:

Liquidity

REITs are publicly traded, providing a high level of liquidity. You can easily buy or sell your investment stake, similar to trading shares in a company. However, this liquidity comes with pricing uncertainty, as the market can be volatile.

On the other hand, Private Equity investments generally have specified hold periods, usually ranging from 3 to 10 years. While they may lack liquidity, this illiquidity helps stabilize emotions and shields investments from macroeconomic fluctuations.

Access to Decision Makers

When investing in a REIT, your communication will mainly involve client relationship managers. It is unlikely that you will have direct access to property-level decision makers.

In contrast, Private Equity investments offer the opportunity to communicate with the deal sponsor themselves. These individuals are directly involved in selecting and managing the assets. Additionally, employees of the firm often invest in the deals, ensuring you have insights from those with direct knowledge of the property.

Ownership

Investing in a REIT provides ownership of a portfolio comprising hundreds of properties. Similar to buying shares in a company, you benefit from overall portfolio performance. However, you won't enjoy the full benefits of a record year, as returns are distributed evenly among investors.

Private Equity investments allow for direct ownership in physical real estate. As the asset performs well, so do you. You receive a Schedule K-1 at the end of the year, entitling you to your proportionate share of cash flow, depreciation, tax write-offs, and potential benefits like accepting 1031 Exchange proceeds or utilizing 401k and IRA funds.

So, which passive real estate investment suits you?

If you prioritize cash flow, liquidity, and don't require extensive tax advantages, a REIT may be your best bet.

However, if you aim to benefit from direct ownership, build wealth without getting involved in daily management, and enjoy tax advantages, Private Equity is likely the more suitable option.

Both REITs and Private Equity can bolster your portfolio and offer diversification. Your choice should depend on your specific investment goals and preferences.


Adam Dickert, a Partner at Progress Realty Partners, brings a wealth of experience to the field of real estate investment. His career started as a commercial broker with Marcus & Millichap, where he established relationships with successful real estate owners, operators, and investment funds. As a Partner at Progress Realty Partners, Adam spearheads acquisition and deal valuation activities, ensuring minimum risk and steadily increasing returns for partners.

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