REITs vs. Private Real Estate: Key Differences Every Investor Should Know

A Real Estate Investment Trust (REIT) is a company that owns or finances income-generating real estate, while private real estate investing involves individuals using private funds to buy real estate assets, typically meant for commercial purposes.

Both REITs and private real estate investments pool capital for real estate ventures, but REITs are often publicly traded, providing greater liquidity. Private real estate, in contrast, usually requires higher minimum investments and is typically geared toward accredited investors. REITs correlate closely with stock market trends due to daily valuation, whereas private real estate remains less impacted by stock market shifts. Let’s explore these differences in more depth.

Correlation

One major difference between REITs and private real estate investments is their correlation with the stock market. The stock market can be volatile, reflecting changes in perceived business value rather than of the physical underlying assets, making REITs—which often trade publicly—susceptible to market swings. It can be riskier to invest a large portion of your funds in both REITs and the stock market, as they tend to move together with market changes, amplifying risk.

Private real estate, on the other hand, tends to have low stock market correlation. Diversifying into non-market-correlated investments like private real estate can help stabilize a portfolio against stock market fluctuations, making it an attractive option for managing risk.

Liquidity

A key difference between REITs and private real estate investments is liquidity—how quickly you can convert your investment to cash.

Private real estate is highly illiquid; it can take years to sell a property and access returns. Like owning a house, private real estate requires patience before cashing out.

In contrast, REITs, being publicly traded, offer stock-like liquidity. You can sell shares quickly, though potentially at a loss. Private real estate’s illiquidity often leads to higher returns but suits investors who don’t need immediate access to funds.

Public Trading

REITs are usually publicly traded, making them subject to stricter regulatory practices and are often restricted from investing in certain assets. For instance, because REITs are required to distribute 90% of their taxable income, they are not suitable for investment strategies that heavily rely on reinvestment of earnings. Their purpose is to maintain real estate for the long term to generate income and are liable to a 100% tax on activities like property improvement with the intention of resale.

On the other hand, private real estate provides more autonomy and flexibility, often aiming for higher returns by investing in properties that require improvements. Private real estate investment firms are not prohibited from investing in assets that need more work, have an efficiency or vacancy issue creating potential, and therefore, can potentially deliver exponentially higher returns than a REIT or the public markets.

For this reason, REITs can be considered a less risky investment to some investors because they’re typically investing in properties that are already high quality and don’t need a lot of work; however, the returns can also be less as a result.

Minimum Investments

REITs generally require lower minimum investments compared to private real estate options, making them more accessible to a wider range of investors. Research the firms you’re considering to learn about their minimum requirements and determine what aligns best with your financial situation.

Targeted Returns

The final difference between REITs and private real estate investments lies in the expected returns. This is highly dependent on the firm you've selected to invest with and their approach to generating returns for their investors. Many REITs aim for returns around 8-10%.

Private real estate returns fluctuate greatly depending on the firm or asset you're investing in. Sonoma Syndication targets returns between 15-20%, net to investors and has historically exceeded this target.

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