REITs vs. Private Market Real Estate: Which Has a Higher Rate of Return?

In 2023, the real estate industry has reached new heights, with the median home price reaching a record high of $389,800 last year. Despite rising mortgage rates, demand for housing will remain strong in 2023, making the real estate sector one of the best performing alternative investment markets.

This trend is likely to continue in 2024 as the Federal Reserve prepares to lower its benchmark interest rate in the coming months, with interest rates on collateralized lending expected to fall.

"Comerica predicts that national home prices will rise 2.9% in 2024," said Bill Adams, Matron Economist at Comerica Bank.

While real estate investment trusts (REITs) are often the first choice for investors who want to diversify their portfolio to include real estate for passive income, the private real estate market is also a rewarding option.

Understanding Real Estate Investment Trusts

A REIT is an investment vehicle that owns, operates, or finances income-producing real estate in a variety of sectors, including residential, commercial, and industrial. One of the main advantages of a REIT, which trades on a stock exchange, is that it provides investors with the liquidity and diversity to access real estate investment opportunities without having to own the real estate directly. The REIT distributes at least $90% of taxable income to its shareholders through dividends.

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Publicly traded real estate investment trusts in the United States have approximately $2.5 trillion in total assets spread over 575,000 properties and 15 million acres of timberland. Over the past 25 years, the aggregate performance of the REIT has outperformed the S&P 500 and other major indices, as well as the rate of inflation. During this period, the annualized return for the FTSE Nareit All Share REIT was 8.62%, while the return for the Russell 1000 Large Caps was 8.08%.

The Premier Circle: Private Market Real Estate

Private market real estate funds are not actively traded on securities exchanges compared to REITs. Financial institutions, hedge funds and other endowments typically invest in private market real estate funds. The aggregate value of the U.S. commercial real estate market is $21 trillion, of which approximately 92% is privately owned and 8% is publicly owned.

Private equity real estate funds are generally proactive, providing investors with more control over property selection, management and potential value-added strategies.

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Some crowdfunding platforms are gradually opening up the private equity real estate sector to retail investors, with significantly higher returns to compensate for the additional risks involved.

Private market real estate has the potential to generate significant returns, especially if a successful property management and value-add strategy is adopted. The illiquidity of private market real estate is also an advantage in times of market instability, as it can insulate investors from short-term market fluctuations.

CrowdStreet has been recognized as the best real estate crowdfunding site for three consecutive years, with a realized IRR of 17.91 TP3T and a median holding period of 3.1 years. As of December 31, RealtyMogul's overall realized IRR was 20.8%.

Private Market Real Estate Risks

Liquidity risk is an important consideration in the private equity real estate sector. Unlike publicly traded assets, these real estate investments are typically less liquid and have lock-up periods, which means it may take time to sell or exit the investment.

Lack of liquidity can be challenging, especially during a recession, and investors may have difficulty divesting assets quickly. Private equity real estate investments are not subject to dividend distribution rules and most dividends are paid from capital gains on the sale of investment properties.

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This article REITs Vs: Which Return Is Higher originally appeared on Benzinga.com.

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