Comparing Public and Non-Traded REITs: What Investors Need to Know

Investing in real estate has long been a proven strategy for wealth accumulation, but not every investor wants the responsibilities of direct property ownership. Real Estate Investment Trusts (REITs) offer a way to gain exposure to real estate assets while benefiting from passive income and diversification. However, not all REITs are structured the same. Publicly traded REITs and non-traded REITs differ significantly in terms of liquidity, accessibility, risk, and fees.

Understanding these differences is essential for investors looking to maximize returns while managing risk. Whether you're considering a 1031 exchange, exploring a 721 exchange, or simply seeking a more strategic approach to real estate investing, knowing how these two REIT structures compare can help you make more informed decisions.

Understanding REITs

Real Estate Investment Trusts (REITs) provide investors with a way to access real estate markets without the complexities of direct ownership. REITs pool capital from multiple investors to purchase and manage income-generating real estate such as office buildings, shopping centers, apartments, and industrial facilities. These investment vehicles can be structured as publicly traded REITs or non-traded REITs, each with distinct advantages and drawbacks.

For investors considering tax-efficient real estate strategies, REITs can also play a role in 1031 exchanges or 721 exchanges (via a 2-step DST transaction), allowing property owners to transition into diversified real estate investments while deferring taxes.

What Are Publicly Traded REITs?

Publicly traded REITs are listed on major stock exchanges and can be bought and sold like stocks. These REITs own and manage income-producing properties across various sectors, including commercial, residential, and industrial real estate.

Advantages of Public REITs:

• Liquidity: Shares can be traded daily, offering flexibility for investors needing quick access to funds.
• Transparency: Public REITs are regulated by the SEC, requiring regular financial disclosures.
• Lower Investment Minimums: Investors can purchase shares through brokerage accounts with relatively small capital.

Despite these advantages, public REITs are subject to market volatility, as their share prices fluctuate with broader stock market trends.

What Are Non-Traded REITs?

Non-traded REITs are not listed on public stock exchanges and are typically sold through brokers or financial advisors. These REITs invest in similar types of real estate as public REITs but operate under a different structure.

Advantages of Non-Traded REITs:

• Lower Volatility: Since they are not publicly traded, their valuations are less impacted by stock market fluctuations.
• Potentially Higher Yields: Due to limited liquidity and longer holding periods, non-traded REITs may offer higher income potential.

However, non-traded REITs come with challenges, including limited liquidity, high fees, and less transparency compared to their publicly traded counterparts.

Liquidity and Accessibility

Liquidity is one of the biggest distinctions between public and non-traded REITs. Investors in public REITs can buy or sell shares instantly, whereas non-traded REITs often require a holding period of five to ten years before allowing redemptions. This makes non-traded REITs more suitable for investors with a long-term strategy or those considering 1031 exchanges to defer capital gains taxes.

Fees and Expenses

Non-traded REITs generally have higher fees, including upfront sales commissions and management fees. Public REITs, on the other hand, have lower transaction costs since they are traded on stock exchanges. Investors should carefully evaluate these costs before committing to a REIT investment.

Choosing the Right REIT Investment

Deciding between public and non-traded REITs depends on your investment goals, risk tolerance, and need for liquidity. Public REITs are ideal for those seeking liquidity and diversification within a stock portfolio, while non-traded REITs may appeal to investors looking for income potential with less exposure to stock market volatility.

For investors considering a 721 exchange, non-traded REITs that participate in UPREIT structures can provide a tax-efficient way to transition from direct property ownership into institutional real estate investments without immediate tax consequences.

Weighing Your REIT Investment Options

Both publicly traded and non-traded REITs have unique risks and benefits. Public REITs provide liquidity and transparency, while non-traded REITs may offer higher yields with lower volatility. Evaluating risk, fees, and investment timelines is essential to determining the right REIT for your portfolio.

Consulting with a financial advisor can help you navigate REIT investment options and assess whether a 1031 exchange or 721 exchange could enhance your real estate strategy.

General Disclosure