There’s no denying that real estate is the go-to alternative investment for individuals who want to diversify their portfolios. Thanks to a growing interest in real estate investments and the high upside they provide, there are now many ways individuals can invest.  Here, we look closely at the differences between Real Estate Investment Trusts (REITs) and private equity real estate investments to help you better understand which investment is right for your portfolio.

Understanding REITs

A Real Estate Investment Trust (REIT) is a company that derives its income primarily from owning real estate investments. Thanks to legislation that was enabled by Congress back in 1960, REITs are taxed differently than C corporations. As long as they distribute 90% of their income to shareholders, they remain exempt from taxation at the corporate level while providing “broad exposure to commercial real estate’s stable, higher-yield returns.”

Private equity real estate, on the other hand, is an asset class that consists of pooled investments in the property markets. According to Investopedia, “such investing involves the acquisition, financing and ownership (either direct or indirect) of property or properties via a pooled vehicle.

Of course, people can also invest directly in real estate by purchasing a rental home or funding development of a new property. However, most investors don’t want to take on the huge initial investment of purchasing a property, let alone the responsibilities of owning and managing the property for years to come. For this reason, most people prefer investing via REITs or private equity real estate.

Relationship to Stock Market

Both REITs and private equity real estate can help investors diversify their portfolios. Yet unlike private equity real estate, which is often praised for hedging one’s risk against the fluctuations of the stock market, REITs are subject to market volatility. These investments operate similarly to traditional stocks, and will not provide the same benefits to investors as private equity real estate.

Liquidity

Since REITs can be purchased and sold like stocks, they provide investors with increased liquidity, which may be beneficial for individuals focused on short-term goals. Private equity real estate is a long-term investment that is well-suited for goal-based investors. Private equity real estate investments may take years to become profitable, but their long-term success is one of the primary reasons savvy investors choose them.

Costs & Fees

One of the largest drawbacks to REITs is the high up-front fees that frequently claim 10% to 15% off their value. Private equity real estate investments generally feature more sustainable fee structures which make them more attractive to many investors.

Traditionally, investing in private equity real estate required a very large up-front investment, which meant only high net worth individuals could afford a seat at the table. However, there are now more affordable options for investors, making this asset class a realistic option for many people. Despite high fees, because REITs operate similarly to stocks, they are relatively affordable and can vary greatly in price, with some selling for around just $50 per share.

Control

Unlike stocks, real estate investments can provide investors with a certain degree of control over their investment. Yet the amount of control an investor has depends greatly on the way they go about investing.

With direct real estate investments, the owner has complete control over the property. They can select renters, set prices, are responsible for maintaining or updating the property, and can make decisions that directly impact their potential return on investment.

On the opposite end of the spectrum, REITs provide the least amount of control for investors. Many times, investors have zero or extremely limited visibility into which properties the REIT invests. However, these no-strings-attached investments also mean that investors need not worry about the costs or concerns associated with maintaining, owning, or managing an investment property.

In terms of control, private equity real estate investments fall somewhere between REITs and direct real estate investments. While they don’t provide complete control (or liability) like direct real estate investments, they typically offer much more control than REITs.

Your Portfolio: REITs or Private Equity Real Estate?

So when it comes to private equity real estate vs. REITs, which should you have in your profile? The answer is both. As the Origin Investments team notes, “a strong portfolio will have REITs for diversification and liquidity, and private equity real estate to counter stock market fluctuations and long-term appreciation.”

However, while REITs operate similarly to the stock market in many regards, private equity real estate gives investors numerous unique benefits and opportunities that simply can’t be attained through REITs. For this reason, private equity real estate is definitely a must-have in most portfolios.

To learn more about how private equity real estate can deliver superior returns and hedge the risks of traditional investments, please subscribe.