Private Real Estate Investment Firms v. REITs

February 20, 2017 - 6 minutes read

Just like the 31 flavors of ice cream available at a rather famous ice cream shop, there are many ways to invest in real estate. Especially relevant, you will find commercial real estate offers the broadest options in terms of investment vehicles. In this blog, we’ll show the differences in private real estate firms v. REITs.

Various Investment Vehicles

Before we explore private real estate firms v. REITs, lets review the various ways in which you too can become involved in commercial real estate.

First, one of the most common ways to own commercial real estate is direct ownership. While not typically considered a “vehicle”, direct ownership accounts for a fair share of the commercial real estate investment traffic.

Next, I’d like to highlight the new comer on the block, crowdfunding. Enacted within the last few years and beginning to collect some momentum, crowdfunding is just what it’s name implies: a place for crowds to fund projects. Because crowdfunding can be used for virtually any project, idea or cause out there, commercial real estate investment is a natural beneficiary.

Private Real Estate Investment Firms

Long considered a tool of the ultra wealthy, private real estate firms come in all shapes and sizes. Each firm designs its own investment plan and criteria for potential investors to digest. As a result, understanding the intricacies of a private real estate investment firm is paramount.

Waypoint Property Group, for instance, has designed its business model around large commercial multifamily assets. These assets represent the tools for Waypoint Property Group and its investors to generate the kinds of financial returns not often found in other asset classes.

Waypoint Property Group works exclusively with accredited investors and has a relatively low barrier to entry to participate in an investment.

Waypoint Property Group prides itself on locating only the best assets in emerging markets throughout the U.S. that can deliver investors returns. Part of that equation involves selecting projects that can be optimized to perform better and/or rejuvenated to increase revenues; all of which positively impacts investor returns.

Most noteworthy is the fact that investors never buy into the firm, but instead invest directly into the projects of their choice.

Real Estate Investment Trusts (REITs)

REIT stands for real estate investment trust and can be privately held or publicly traded. These are the basic characteristics.

Each REIT, like a private real estate investment firm, has its own investment criteria. Some REITs may focus on commercial multifamily like Waypoint Property Group. Some others may focus on other commercial real estate such as:

  • Self-storage
  • Hospitality
  • Retail
  • Mixed-Use
  • Office

And still others may work with a combination of real estate assets.

If private real estate investment firms look like REITs from the outside, it’s because they share many of the same traits. Public REITs and private REITs may actually operate under similar rules and regulations as private real estate investment firms, not making SEC regulations the distinguishing characteristic. But let’s review a key distinction between the two.

Private Real Estate Investment Firms v. REITs

The biggest difference between private real estate investment firms and REITs is investor ownership.

When you invest with a REIT, whether it is public or private, you invest in the actual real estate investment trust. This means you own part of the trust and are therefore an owner of every asset the REIT holds.

This is markedly different than the ownership structure of a private real estate investment firm. As we implied in the first section of the blog, investors looking at projects of private real estate investment firms, invest in the specific projects of their choosing.

As a result, investors are insulated from a few concerns with private real estate investment firms:

1. Liability across all owned assets. Investors with private real estate investment firms own a share of an entity that holds the asset of their choosing. Not so with REITs.

2. Not interested in owning some asset classes. When you are invested with REITs, there are no choices about which assets you would like to own. You own part of them all. Not so with private real estate investment firms.

3. Victimized by “bad boys”. Depending on the language of your private real estate investment firm’s operating agreement, as an investor and owner protections are in place for bad actors. They can be removed and replaced, if necessary. And while similar language may appear with a REIT, the standard by which this happens may be substantially different. Additionally, more financial damage is likely given the breadth of exposure with a REIT.

In Conclusion

The basic difference between these vehicles is ownership. How do you want to hold ownership to your commercial real estate? In a pool with many other (and perhaps miscellaneous) assets like we see with REITs? Or asset-by-asset of your choosing, as would be the case with private real estate investment firms?

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