There are a lot of reasons not to invest in private real estate investment trusts, or REITs. From a general lack of transparency with investors to their illiquid nature, there’s a lot to dislike about private real estate investment trusts.
However, there are two sides to every story, and private REITs do raise a significant amount of investor capital each year, so there must be something good about them. So let’s take a look at the other side of the argument. With that, here’s a rundown of the drawbacks, as well as the advantages, of investing in private REITs.
Lots of downside to private REIT investing
If you do a Google search on the term "private REIT," most of the content you’ll find has a negative tone. And there’s a good reason for this -- there are many good reasons not to invest in private REITs.
For one thing, private REITs aren’t subject to much regulatory scrutiny, so they don’t have to be transparent with investors when it comes to conflicts of interest and other matters. Also, private REITs aren’t liquid investments -- you can generally only redeem your shares at certain infrequent points in time, and at the company’s own terms.
Furthermore, many private REITs have extremely high commission structures that can make variable annuities seem cheap. It isn’t uncommon for a private REIT to charge front-end commissions of 10% or more.
Finally, private REITs are typically only available to accredited investors, meaning institutions and individuals with over $1 million in investable assets or annual income greater than $200,000. And like most investments of this nature, private REITs typically have relatively high minimum investments -- as much as $25,000 or more in many cases.
Now, dealing with all of these drawbacks could make sense if there wasn’t an attractive alternative, but publicly traded REITs have proven to be excellent long-term investment vehicles. In fact, over the past 10 years, publicly traded REITs have actually beaten the total return of the S&P 500, and many of the largest public REITs have done even better.