What is a Private REIT?
A private REIT (Real Estate Investment Trust) is a real estate fund not listed or traded on public stock exchanges, which makes it less volatile. These investment trusts are also exempt from Securities and Exchange Commission (SEC) registration, under Regulation D of the Securities Act of 1933.
If you’re interested in investing in a private REIT, read the rest of this article. We’ll explore how private REITs work, their pros and cons, and how they vary from public REITs.
What are Key Characteristics of Private REITs?
Private REITs usually contain the following characteristics, which include pros and cons.
- Private REITs aren’t registered with the SEC and don’t appear on public exchanges. Instead, they are sold to institutional investors.
- Although private REITs aren’t as heavily regulated as public REITs, this can make them riskier.
- They provide increased flexibility because they don’t have to meet the same reporting and regulatory requirements.
- They’re pass-through entities, so REITs don’t have to pay federal corporate income tax.
- Since they lack the same liquidity offered by public REITs, selling your investment can be more challenging.
Who Can Invest in a Private REIT?
Private REITs are mainly available to institutional investors and accredited investors. Minimum investment requirements tend to be high, with anything from $1,000 to more than $100,000 being the norm. These investment trusts are favored among investors looking for long-term commitments.
Accredited investors need to meet one of the following requirements:
- Income. Investors must have a net worth of more than $1 million (either on their own or combined with a spouse or partner). They need to earn an income that’s more than $200,000 individually or $300,000 combined with a spouse over the last two years and with the expectation of earning the same during the current year.
- Credentials. The Financial Industry Regulatory Authority (FINRA) specifies credentials, certifications, or designations that they recognize.
- Sophistication. An investor can be accredited if they have experience in and knowledge of financial and business industries.
Private REITs vs Public REITs: What are Their Main Differences?
Public and private REITs have some important differences, besides not being listed on public stock exchanges. Here’s a rundown of the most important ones.
- Information disclosure. Public REITs involve audited and filed financial statements with the SEC. By comparison, private REITs provide less information, such as performance metrics.
- Minimum investment. Public REITs require a $1,000-$2,500 minimum investment amount per share, while you’ll need to pay at least $1,000 to $100,000 for private REITs.
- Liquidity. Public REIT shares can be purchased or sold easily, whereas private REITs are illiquid.
How Do You Invest in a Private REIT?
If you’re interested in investing money in a private REIT, there are some steps you’ll need to follow.
- Verify your accreditation. The private REIT will have to conduct due diligence to ensure that you are an accredited investor. If you wish to invest, accreditation usually requires verifying your status with the issuer.
- Conduct your research. You want to research the private REITs thoroughly to ensure that they are aligned with your business and investment goals. Specifically, you should review the private REIT’s memorandum. This document includes important information regarding the investment, its strategy, risks, and fees.
- Access the private REIT. Working through a financial advisor is beneficial, but you can also work directly with the company managing the REIT.
- Do your research. You want to analyze the REIT before you invest. This involves monitoring its previous track record and researching its team.
- Get ready to invest. When you are happy with the private REIT you’ve identified and researched, you should complete paperwork required and fund the investment.
- Check the REIT’s performance. It’s essential to monitor the REIT from time to time so that you can be sure it is still aligned with your professional goals.
What are Pros and Cons of Private REITs?
There are some important advantages and disadvantages to know about when investing in private REITs. These include the following.
Pros
- Investors can receive higher returns. This is because it’s common to find private REITs involved in specialized real estate markets.
- Private REITs ensure diversification because you can gain access to a wide range of assets.
- There are tax benefits involved.
- They offer stability. Since private REITs don’t experience market fluctuations on a daily basis, this can make them more predictable and less volatile if the market drops.
Cons
- Private REITs don’t make it easy to access capital quickly, as they have limited liquidity.
- Since private REITs don’t have as many regulations as public REITs, this can be riskier.
- There can be complicated fee structures involved.
What Legal Documents are Involved in Private REITs?
There is lots of paperwork involved with private REITs. For investors, the documents they’ll typically receive include the following:
- Private Placement Memorandum (PPM). This document includes information about various aspects of the investment, such as its risks and fees.
- Subscription Agreement. When an investor is ready to invest, this is the document they will be asked to sign. It will include information about aspects such as investor accreditation and risk tolerance.
- Investor Questionnaire. This serves to confirm the status of the accredited purchaser. It also includes information about the investor and ensures regulatory compliance. The issuer is protected because this document explains that they would have conducted due diligence to verify the investor qualifications.
Do You Need a Lawyer for Private REITs?
It’s important to work with a lawyer for a private REITs, as these investments can be complex and risky.
A lawyer will help you to navigate the investment process, such as by:
- Explaining and clarifying securities laws.
- Helping you navigate complex tax regulations to minimize your risks.
- Drafting and reviewing all important documents included.
- Assisting you with dispute resolution, should misunderstandings or disputes occur.
- Ensuring that the investment is aligned with your financial goals and risk tolerance.
Where can you find a lawyer for a private REIT?
If you need to work with a lawyer for a private REIT investment, you should consult with a professional, reliable lawyer from ContractsCounsel, an online legal marketplace that connects you to vetted lawyers on the platform.
They’ll help you to navigate the private REIT landscape, ensure you are legally compliant, and safeguard your interests.
