If you’re an investor looking to put your capital into real estate, you have most likely heard of public REITs and private equity funds. REITS and private equity remain two of the most popular ways of investing in real estate, as they are relatively hands-off. However, though they operate in a similar manner, there are key differences that can be the difference between a good and a bad investment. Here are some things to keep in mind when choosing between REITs and private equity.
REIT stands for real estate investment trusts. The three types of REITs are equity, mortgage, and hybrid. Some investors consider hybrid REITs the best of both worlds because they combine property ownership and mortgage backed loans. REITs are traded on public exchanges like stocks. They will pay 90 percent of their income to investors in the form of a dividend.
The primary difference between most REITs and private real estate equity funds is that private equities are not publicly traded. Also, private equities usually pay higher dividends, offering investors the opportunity to grow their wealth at a faster rate. However, a higher reward potential can mean a higher risk factor and private equities are no exception. For example, investors sometimes don’t know exactly what it is they’re investing in, as they put up the capital before the property is bought.
Though both publicly traded REITs and private equities have their advantages, there are some issues investors should consider carefully before diving into the real estate market:
The first concern to be aware of is high fees. They are often the most off putting trait of private equities. While dividends from both public and private REITs are taxed as income, there are many times upfront fees associated with private equities. These fees can be as high as 15 percent of the offering price, which lowers the actual value of the investment.
Another concern is that there is no liquidity in private equities. What this means is that since they aren’t publicly traded on the exchange, you can’t sell quickly if you don’t like the direction your investment is taking. It can take a decade or more to get out of a private equity investment because the investor has to wait for it to either be listed publicly on the exchange, or be liquidated. That’s why it’s important for investors to assess their risk tolerance before choosing which type of investment is right for them.
As with most decisions in real estate, it’s vital to do your due diligence and research your choices as much as possible. Knowing the small details when it comes to investing can save you from funding a costly mistake.