How Do Private Equity Real Estate Investments Stack Up Against REITs?

Real estate investment trusts (REITs) have historically been one of the only options available for individuals to invest in commercial real estate, since private equity investments have traditionally been limited to institutional investors.

A series of regulation changes over the past decade has changed that, however. Retail investors now have access to a wide range of passive real estate investments outside of publicly traded REITs and other real estate-related stocks.

However, REITs have performed well for investors over the past 20 years. The FTSE Nareit All Equity REITs index has outperformed the S&P 500 in total returns during 13 out of the last 20 years with an average total annual return of 13.1% versus 11.1% for the S&P 500 over the same time period.

Does it really make sense to invest in private equity when the public markets are already producing solid returns?

Total Returns

Based on Benzinga’s data of the average returns from the top real estate investment platforms, private equity real estate has produced average total annual returns ranging from 17.4% to 25.56% over the past 9 years, compared to a 12.42% average total return for the FTSE Nareit All Equity REITs index.

Of course, there are some important factors to consider when comparing these two types of investments.

Available Data

Data available for private equity returns is limited. Returns are being calculated based on sponsor-reported data from a small handful of companies compared to publicly available information from the index that currently comprises 156 companies.

Liquidity

Publicly traded REITs also allow investors to move in and out of the market as liquidity needs change, while private equity investments can have minimum investment terms ranging anywhere from three to 10 years.

However, real estate is best suited as a long-term investment, whether through publicly traded REITs or private equity investments. The limited liquidity options actually help keep the real estate market more stable compared to the stock market, since panic can’t result in a short-term selloff.

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Investment Options

Private equity investments through platforms like CrowdStreet allow investors to choose specific deals to invest in rather than having to analyze the outlook on an entire REIT portfolio. Options aren’t limited to specific deals, however. Most platforms also have managed private equity funds that allow investors to diversify across multiple properties.

The minimum investment required to access private equity real estate is often significantly higher than the minimum required to purchase shares of a publicly traded REIT. Private equity real estate platforms typically have minimum investments starting at $25,000.

However, a third option is becoming increasingly popular; non-listed public real estate offerings. A few new platforms are offering real estate investments through Regulation A+ offerings to non-accredited investors.

For instance, Arrived Homes sells shares of rental properties with a minimum investment of only $100. Other companies, such as CalTier Realty, have offerings for real estate funds with minimum investments in the $500 to $1,000 range.

Which is the Better Option?

The simplicity that comes with buying and selling shares of publicly traded REITs make them a logical option for most investors. However, those seeking out higher potential total returns that are willing to commit to longer-term investments would be wise to explore private equity and non-traded real estate investments.

You can access a variety of private equity and Regulation A+ real estate offerings through Benzinga’s Real Estate Offering Screener and filter opportunities based on your personal criteria.

Photo by CHUTTERSNAP on Unsplash

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