Would you want to know private equity real estate vs reit? My experience tells me that real estate is king, but this is nothing new. The many approaches to real estate investing, however, ARE new.
You shouldn’t have to, but I get that you’re sitting there thinking, “No way am I unclogging toilets and shaking tenants down for their rent.”
Because of this, passive real estate investments are growing in acceptance and becoming more widely available. However, with so many new opportunities to participate, how can you decide which is best for you?
Before choosing, let’s examine the two most common options: REITs and Private Equity. To select the greatest path for you, it’s vital to comprehend how one differs from the others.
A Real Estate Investment Trust (REIT) comes first. This company, trust, or organization trades like a stock and makes direct real estate investments that generate revenue.
However, private equity real estate (PERE) and real estate investment trusts (REITs) are also viable alternatives to conventional real estate investment strategies that can create wealth.
Private equity firms and REITs are the two most well-liked avenues for investing in private commercial real estate.
Before investing, like any big financial decision, it’s important to consider and understand all relevant elements carefully.
Keeping that in mind, let’s examine PERE vs. REIT in more detail and the key distinctions between private equity real estate investments and REITs.
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Now, let’s get started.
What Is REIT
Like stock markets, real estate investment trusts (REITs) purchase and sell properties to generate revenue.
Mutual funds that primarily invest in equities issued by publicly traded real estate corporations are known as real estate funds. While both might help you diversify your holdings, you should know their key distinctions.
BECAUSE OF THIS
- Real estate investment trusts acquire and sell income-generating assets.
- A type of mutual fund called a real estate fund buys securities from public real estate companies, like REITs.
- REITs give regular payments, while real estate funds make money by the value of the properties they invest in going up.
- For a business to be considered a REIT, it must follow certain rules set up and enforced by the IRS:
Every month, 90% of taxable income must be returned to owners. This is tax-friendly for REITs but not for investors.
75% of the gross income must come from sources related to real estate.
It has to be passive 95% of the gross income.
It should be set up like a mutual fund, where investments are shared and managed by a fund manager.
Must be mostly owned by shareholders (at least 100 after the first year of business).
To be taxed as a company under the Internal Revenue Code
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What Is Private Equity Real Estate
A REIT is a type of investment company that pools investor capital to purchase investment properties with the expectation of future capital appreciation.
Most of the time, these properties are “income-producing” properties, like storage units, apartment buildings, or mobile parks where people pay rent.
Real estate can sometimes be invested in on its own, but what makes a REIT special is that it lets buyers buy shares in it.
Investors usually buy shares in a REIT to share in the profits made by the real estate. Because they trade on a public stock exchange, REITs are naturally flexible.
On the other hand, they are naturally very hard to sell because they don’t give shares on a public stock exchange. Usually, an owner needs to put at least $250,000 into a real estate private equity fund to join.
Regarding some funds, the smallest amount you can put in is in the millions.
REITs and private equity real estate are different. An equity REIT is a publicly traded stock representing real estate investments. Its main income source is rental income from its real estate holdings.
Key points: Private equity real estate is a fund that deals in real estate and is handled by professionals.
On the other hand, private equity real estate buying needs a lot of money and may only be open to accredited or high-net-worth buyers.
Most of the time, this kind of investment is risky and costs more than other types of real estate investment funds. However, returns of 8% to 10% are typical.
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Why Invest In Private Equity Real Estate
Even though this type of business could be more flexible and liquid, it can bring in a lot of money and see its value rise quickly.
Core strategies often give returns between 6% and 8% per year, while core-plus strategies often give returns between 8% and 10% per year.
Value-added or creative tactics can bring in a lot more money. Still, private equity real estate is so dangerous that buyers can lose their money if a fund needs to improve.
PERE firms also take care of management so investors don’t have to, and they have experts on staff who know how the business cycle works.
One bad thing about buying in PERE is that it takes more work to sell.
It takes work to turn real estate into cash at its fair market value, like with REITs sold on the stock market.
For example, getting the best market price for selling an apartment block or business block could take months or even years.
This lack of freedom and the risk of keeping money locked up for a longer time makes buyers demand what is known as an “illiquidity premium”—a higher rate of return. These extra gains don’t appear in open, very liquid markets and could lead to a better ROI over time.
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What Is The Difference Between Private Equity Real Estate VS Reit
REITs and private equity real estate funds differ significantly. One important difference is that REITs are sold on the stock market, while private equity funds, as their name suggests, are not.
REITs are more flexible than private equity funds because they are sold on the stock market. If you want to make money quickly, this can be a good thing about REITs.
Selling off:
The speed with which you can get your money back in cash is a big difference between PERE and REIT. REITS traded on a public market are liquid, making them easy to buy and sell. When it comes to private equity real estate deals, the opposite is true.
Trading in public:
Because REITs are sold on the stock market, they have to follow tighter rules and usually can’t invest in certain assets. Selling shares in private equity real estate companies is impossible, so there is no market for exchanging them.
Investments at a Minimum:
Real estate investment trusts (REITs) usually have lower minimum investment standards than private real estate purchases.
The first investment in a private equity company is generally at least $25,000. It can sometimes be as much as $100,000 or even more.
Main Points:
Two common types of private business real estate investments exist real estate investment trusts (REITs) and private equity real estate firms.
A private REIT is a tax-advantaged business that sells shares to qualified buyers through financial advisors, broker-dealer networks, and direct marketing.
People put their money into “pools” of capital, which are then divided up however the investment manager sees fit.
A Private Equity Real Estate Firm’s job is similar to an LP’s:
spending client money on real estate assets. However, they work under different legal, tax, and dividend frameworks.
There are times when one choice is better than another. Instead, an investor should carefully look at the details of each layout to see which one fits their wants and tastes.
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What Is The Benefit Of A REIT
Even though this isn’t the same as a Private Real Estate Fund, the best thing about REITs is that they keep corporations from paying taxes twice.
Any business must first pay its taxes, then give out dividends from its earnings after taxes, and the owners must then pay taxes on those dividends.
This is called “double taxation.” Under the IRC, if all the conditions are met, there is no taxation at the company level for REITs. Only the shareholders are taxed, which is a favorable tax policy.
REITs benefit buyers from buying in both business real estate and stock traded on the stock market.
Because income-producing real estate is a good investment, REIT owners have generally gotten reasonable long-term rates of return that are similar to or higher than those from other stocks and bonds.
REITs must give at least 90% of their taxed income to owners annually as dividends. The industry’s dividend yields have long been a steady source of income through a wide range of market situations. They are generally much higher than those of other stocks.
Along with the past investment success and portfolio diversification benefits that come with investing in REITs, these companies also offer a number of benefits that you won’t find in companies in other industries.
These pros are one reason REITs have become increasingly popular with buyers over the last few decades.
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What Is The Benefit Of A Private Real Estate Fund
The way the K-1 is taxed is what many buyers care about. Losses can go straight to the Limited Partners on a K-1 but not in a REIT or a 1099.
I’ve written out all three benefits in full below to help buyers make smart choices about private real estate:
1. The first benefit is that private real estate gives you high absolute returns.
Investors can get high absolute gains when they buy private real estate. An absolute return looks at both growth and devaluation to determine how much money an investment makes over time.
A study business called Preqin keeps track of the success of alternative investments.
They say that a $100,000 investment in private real estate on January 1, 2001, would have been worth about $380,000 on March 1, 2017. On March 1, 2017, that $100,000 put into the S&P 500 would be worth $255,000.
2. private real estate is not significantly linked to other types of assets.
Each strategy aims to get the best overall gain with the least risk. Most buyers are fine with having a mix of stocks and bonds in their portfolios, at least until the ups and downs of the market start to worry them.
Because it can’t be affected by the daily ups and downs of selling, private real estate helps owners keep their portfolios from becoming too volatile.
3. Owning a private home saves you money on taxes.
Real estate buying has a significant benefit that investors need to see if they only look at the investment’s core returns and not its after-tax yields. Most of the time, property income is protected by depreciation. This means owners get a lot of cash flow with minimal tax load over time.
Note: I kept this blog high level on purpose. Significant differences exist between a Private Real Estate Fund and a publicly owned R.E.I.T. regarding liquidity, investor access, reporting openness, etc.
The point is to show that a REIT can operate in many different ways, but its tax treatment will always be the same. This is very different from how a Limited Partnership is taxed.
Private Equity Real Estate VS Reit, Which Is The Better Investment Option
A REIT is the best choice if you only care about cash flow and liquidity, not tax benefits.
Private Equity is the best option to get the rewards of direct ownership and build wealth without doing much work.
It all depends on your financial goals, which choice will help your wealth and give you more options.
Private equity real estate and REITs are better-organized capital pools for real estate investments. You can only say for sure which choice is right or wrong.
Instead, you should carefully look at their designs’ details to see which fits an investor’s needs and tastes the best.
People of all income and experience levels can invest in REITs, but asset managers are better matched to PEREs.
It would help if you talked to your financial expert immediately to determine whether a PERE or a REIT is better for you.
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Final Thought
Now that we have established Private equity real estate vs reit, however, A private equity real estate fund may be appropriate if you want a long-term investment.
REITs and REPEs are two methods to invest in real estate, but they have distinct strategies, risk profiles, and structures.
Although REPE typically entails more risk and a longer investment horizon, it allows for more hands-on management and potentially more significant profits.
REPE often includes direct property investment. Conversely, publicly listed companies known as REITs own or finance income-producing real estate and provide investors with a more liquid, dividend-paying passive investment option with a usually lesser potential for significant gains.