While both can play a role in a diversified investment strategy, you must understand their structure, benefits, and limitations in order to choose the right approach for your financial goals.
What Are REITs?
REITs are companies that own or finance income-producing real estate. They were created to allow individual investors to earn returns from real estate without having to buy or manage properties themselves. REITs pool capital from investors and pay out dividends derived from rent or interest income.
There are three primary types of REITs:
- Publicly Traded REITs are listed on major stock exchanges, offering liquidity and broad accessibility. Investors can buy and sell shares just like stocks.
- Public Non-Traded REITs are registered with the SEC but not listed, meaning they are less liquid and often come with holding period restrictions.
- Private REITs are unregistered and typically offered to accredited investors through private placements.
One appealing aspect of REITs is their accessibility. With relatively low investment minimums and the ability to buy shares through a brokerage account, they offer a straightforward entry point into real estate investing.
What Are Private Real Estate Funds?
Private Real Estate Funds are pooled investment vehicles that acquire, manage, and eventually sell commercial real estate assets. These funds are typically structured as Limited Liability Companies (LLC) or Limited Partnerships (LPs) and managed by a sponsor or general partner who oversees the strategy, acquisitions, and operations on behalf of the investors.
Unlike REITs, private funds are generally open only to accredited investors—those with a net worth over $1 million (excluding primary residence) or income over $200,000 annually ($300,000 jointly) for the past two years. Investment minimums are typically higher and investors gain access to private real estate investment opportunities and a strategy built for long-term performance.
Key Differences: Private Real Estate Funds vs. REITs
While both structures offer exposure to commercial real estate, their mechanics and investor experiences differ. Below we will outline a couple of keys differences we believe are important for Investors to consider.
- Liquidity
If liquidity is a priority, publicly traded REITs have a clear edge. Investors can exit their position by selling shares on the open market. Private real estate funds, by contrast, are typically long-term commitments, often with investment horizons of 5–15 years and limited (if any) redemption opportunities. The illiquidity of private funds, however, may come with a premium: private funds often have targeted returns which are higher than those of REITS in consideration of tying investors’ capital up for a longer period of time.
- Risk & Return Profile
Unlike publicly traded REITs, which are subject to daily public market fluctuations, private real estate investments are not exposed to the same level of volatility. Because valuations are based on the actual income and underlying value of the properties and not influenced by public trading activity, private real estate tends to offer a more stable and predictable investment experience. This insulation from short-term market swings can help reduce perceived risk and may provide investors with greater confidence during periods of broader economic uncertainty.
- Tax Treatment
REITs and private real estate can differ significantly in tax treatment. Private real estate ownership, often through LLCs or partnerships, can offer investors greater control over tax planning, including the ability to use cost segregation studies and bonus depreciation, as well as the potential to utilize passive losses to offset other passive income, but don’t benefit directly from property-level depreciation or other tax shelters.
Making the Most of Your Real Estate Allocation
Both REITs and private real estate provide investors access to commercial real estate investment, but they do have differentiating factors which investors should consider. REITs deliver market-based diversification, offering exposure to investments which are more liquid and at lower minimums. However, REITs have greater susceptibility to public market volatility, may have lower targeted returns and less potential tax benefits.
In contrast, private real estate funds are less susceptible to public market conditions, typically targeting higher returns and greater potential tax benefits. However, private real estate funds may have barriers to entry (accreditation and larger minimums) and are generally more illiquid than REITs.
For investors seeking diversification, less correlation to public markets and volatility, and potential tax benefits, Private Real Estate Funds can offer a compelling alternative to REITs. While they require a longer commitment and higher investment minimums, the benefits may be worth the trade-offs.
At MLG Capital, we’ve built our platform around helping accredited investors gain meaningful exposure to commercial real estate through diversified, tax-efficient funds. If you’re exploring how private real estate could enhance your portfolio, reach out to our team to learn more.
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Disclaimer
Securities offered through North Capital Private Securities, Member FINRA/SIPC. Its Form CRS may be found here and its BrokerCheck profile may be found here. NCPS does not make investment recommendations and no communication, through this website or in any other medium, should be construed as a recommendation for any security offered on or off this investment platform.
This article is intended solely for accredited investors. Investments in private offerings are speculative, illiquid, and may result in a complete loss of capital. Past performance is not indicative of future results. Prospective investors should conduct their own due diligence and are encouraged to consult with a financial advisor, attorney, accountant, and any other professional that can help them to understand and assess the risks associated with any investment opportunity.
This offering includes risks and uncertainty many of which are not outlined herein including, without limitation, risks involved in the real estate industry such as market, operational, interest rate, occupancy, inflationary, natural disasters, capitalization rate, regulatory, tax and other risks which may or may not be able to be identified at this time and may result in actual results differing from expected.
Advisory services offered through MLG Fund Manager LLC, an investment adviser registered with U.S. Securities & Exchange Commission.
