Real estate investment trusts, also known as REITs, are a tool for real estate investors seeking to earn passive income. REITs allow investors to pool their money to own shares in a real estate investment. Ultimately, many REITs can be purchased the same way that stocks are purchased on the New York Stock Exchange. While most REITs are publicly traded, and thus regulated by the SEC, there are also private REITs. Understanding how private REITs work, how they are governed, and the potential benefits associated with investing in them can help you make an educated decision about whether or not private REITs are something to consider adding to your investment portfolio.
Private REITs are a form of real estate investment trust that are not traded on a national stock exchange. Publicly traded REITs can be purchased through a broker and are subject to the governance of the SEC. Conversely, since private REITs are not open to public exchange, they are not governed by the SEC. Instead, private REITS, which you may also hear called private placement REITs, are exempt from SEC registration under Regulation D of the Securities Act that was signed into law in 1993.
The general premise of a private REIT works the same as a publicly traded REIT. A trust company gathers money from investors, who then receive shares in the investment properties that the trust company owns. Quarterly dividends are then issued to investors in the same way that traditional stocks work.
It’s important to note that only certain investors are legally allowed to invest in private REITs. Since these REITs are not governed by the SEC, only accredited investors are allowed to invest in them.
If you meet the requirements of being an accredited investor, you invest in a private REIT the same way that you invest in a traditional REIT. The trust company sells shares in the REIT, and you simply purchase the number of shares that you want.
Even though private REITs are not subject to the rules set forth by the SEC, thus making them a bit riskier, there are several benefits associated with investing in private REITs. Additionally, there are no daily market fluctuations that have to be dealt with when investing in a private REIT. Since private REITs generally calculate their prices only once per quarter, investors won’t see daily price increases and decreases like they would with traditional REITs. Finally, private REITs are not subject to the regular financial reporting and compliance costs that publicly traded REITs are. In some cases this provides the potential to generate better risk-adjusted returns for their investors.
Private REITs may not be right for everyone. However, if you are an accredited investor who wants to invest in real estate and are seeking passive income, they can provide an option for you.