Investors often overlook private REITs as overly risky because they offer less information than their “public” counterparts.
In fact, a well-run private REIT is aware of the benefits of empowering and educating its shareholders.
Here are some promising indicators to look for as you explore private REITs as an investment option:
- The management has a solid reputation and experience. The biggest risk associated with any investment is often management practices. Choose a REIT with a management team that is experienced and open to sharing your acquisition, project financing, and asset management practices.
- Upon request, investors are given access to reporting materials. Long-established private REITs have an open-door policy and offer significant disclosure and education to both current and potential investors. A favorable private REIT should provide investors with audited financial statements, annual reports, and a copy of the Offering Memorandum, or “OM” (a document similar to the REIT’s public prospectus that describes the purpose of the REIT’s capital raising and facts related to the investment opportunity), although the private REITs are not required by law to publicly display their audited financial statements and prospectuses.
- The REIT temporarily closes to new investments when it raises enough investor equity to fund new property acquisitions. Although this means that investors may not be able to get into the REIT when they want to, a temporary close in equity raising is a very good sign: it demonstrates discipline and proper management.
- There are no hidden fees. 100% of the investors’ capital investment should be going to work for them. Management fees (property management, asset management, wealth management, etc.) should be reasonable and fully disclosed.
- The redemption policy is reasonable. Ask if there are any penalties for breaking the terms of your investment timeline (redeeming too soon) or if there are redemption fees.
- The REIT’s business model aligns with your investment goals. The corporate structure of the REIT should be straightforward and easily understandable. Does the REIT buy cash-flowing real estate or invest in speculative developments? Which asset class is its focus?
The issue of illiquidity is another concern that many investors have with private REITs. The fact that private REIT units cannot be sold as rapidly as those on the public markets means that short-term, quick-turn investors should definitely avoid private REIT investments. This reality, however, is consistent with the private REIT theory that real estate is supposed to be a long-term investment: it should be considered as a way to generate long-term cash flow, just as it is not meant to be on the public market and exposed to the volatility of the stock market. In other words, applicants who plan to sell within a few days are not required.
With private REITs, there is no secondary market in which to buy and sell units, so careful research should be done to understand where the REIT’s liquidity is coming from and whether there are current liquidity issues.
A properly managed REIT budgets for redemptions as part of its regular course of business and your funds should be returned to you at full market value.
Retail investors have a unique opportunity to access massive institutional assets through REIT investing that they might not otherwise have had access to. Private REITs might be a dependable and realistic investment choice for knowledgeable and sophisticated investors interested in long-term income flow and the stability of real estate investing.