Private real estate vs REITs, and what you actually own

Most people looking at a private real estate offering already own listed real estate — a REIT, or a REIT index fund in a retirement account. What they want to know is what a private deal adds, because it asks them to give up the ability to sell.

This is written by a developer. We run one debt fund and one equity fund, and both are illiquid — exactly the thing a listed REIT is not.

Two things wearing the same name

A REIT is a corporation. It owns real estate, it elects a tax status that spares it entity-level tax on the income it distributes, and if it is listed, its shares trade on an exchange. What you buy is a security, priced by whoever is willing to trade it that morning. The buildings sit several layers underneath, chosen by someone else.

A private interest is a different instrument. You are a member or a limited partner in one entity, and that entity owns identified assets — in our case apartment communities of the kind you can look up and drive to. You hold a capital account in that partnership, and there is no market in it. Which partnership that is depends on how the offering reached you: subscribing directly puts your name on the sponsor’s own register, while a platform that interposes a feeder entity admits you to the feeder instead, which changes who votes, who reports to you, and whose name is on your K-1. Whether every asset is named on the day you commit depends on whether that entity holds one building or pools several.

So the comparison is not between two funds but between a security and an asset, and most of what follows comes from that. The guide to Ohio multifamily investing sets out how a development interest differs from buying a stabilised, occupied building. Lending to a project rather than owning a share of it is a separate decision again.

Not every REIT trades

REIT names a tax election, not a trading venue, and it covers two products that behave nothing alike. A listed REIT trades on an exchange. A non-traded REIT makes the same election and does not trade at all. Its shares are bought at a price the sponsor calculates rather than one a market sets, and sold back through a repurchase programme that is capped, queued, and capable of being suspended.

The liquidity argument below is about listed REITs, and it does not transfer. A non-traded REIT has to be compared on its own terms: who sets the price and on what evidence, what the repurchase cap is, and what happens when every holder asks at once. If it does not trade, do not credit it with the advantages of the exchange.

What the money buys, and at what basis

Basis is where the two diverge first, and most comparisons skip it. A REIT buyer pays what the market asks that morning. That price already contains everyone else’s opinion of the portfolio, the management team, and the direction of rates. You are buying the opinion at the same time as the assets.

A development investor comes in at project cost. There is no building yet, so there is no price for one. The basis is land, materials, labour, fees, and financing cost, because that is what building costs. Nobody marked it up first.

Cost is also an estimate until the building is finished. Construction and lease-up risk sit where the market premium would otherwise sit, and they land at identifiable points in the stages a development runs through. The communities we have built are published, by name and address, on the communities map.

Liquidity is the honest advantage of the listed market

What an exchange gives a holder, and a private fund does not:

• You can sell on any trading day, at a price quoted before you commit, in whatever size the market takes that day.
• You can buy one share. There is no minimum and no allocation to negotiate.
• There is no accreditation gate. Income and net worth are nobody’s business.
• No subscription documents, no capital call on someone else’s schedule, no lockup.

None of that exists in a private fund. The liquidity row on both of our funds reads Illiquid, and each fund’s targeted hold period is published beside it on the fund terms page. Plan on holding to the end of the term and treat an earlier exit as unavailable rather than difficult. What that lock is buying is a subject of its own.

If liquidity is the binding constraint on the money in question, the comparison is over and the listed market wins it. Nothing below changes that.

A price that moves is not the same as a value that moves

A listed REIT is repriced every trading day, by people who are not necessarily thinking about the buildings. An index adds it or drops it. A fund that holds it meets redemptions. Rate expectations shift, and every listed vehicle holding leveraged property moves with them. Apartment buildings do not change hands weekly. The shares do.

A private capital account does not behave that way. It is reported periodically rather than quoted continuously, from statements the sponsor prepares — capital account balances, distribution history, quarterly reporting. Nothing arrives on a Tuesday to say the position is worth less than it was on Monday.

An unpriced interest is unpriced, though. It is not protected. A building that has lost value lost it whether or not anyone published a figure, and a statement that changes slowly is a fact about the statement rather than the asset. The real difference is behavioural. An investor who cannot sell cannot sell at the bottom. That is worth something to someone who knows they would have sold, and it is not safety.

The tax treatment is genuinely different

A REIT escapes entity-level tax by distributing most of its taxable income to shareholders. Depreciation is used inside the REIT, against the corporation’s income, and the shareholder never takes a deduction. They take a dividend instead, taxed largely as ordinary income, part of which may be a capital gain dividend or a return of capital. Section 199A has allowed a deduction for qualified REIT dividends, subject to its own conditions and to the provision being in force for the year in question — a point to confirm for a specific year rather than a constant.

A partnership does the opposite. It is not itself a taxpayer. Income, deductions, and credits are allocated to the partners on a Schedule K-1, so a partner takes their share of the depreciation against their own income rather than second-hand, inside a company that has already used it. A development partnership passes a great deal of it through early.

Whether that deduction is worth anything to a particular investor is a separate question, and the partner’s basis, the at-risk limit and Section 469 decide it rather than the deal. That chain runs out to recapture at exit, which is a large enough subject to have its own article. The narrower version — whether a real estate loss can be set against salary — is answered separately, and the after-tax calculator estimates what the treatment is worth to you against a fully taxable alternative.

The pass-through has costs of its own. A K-1 arrives later than a 1099, often late enough to force an extension, and a partnership that owns property in a state can create a filing obligation there.

Both charge fees, and they sit in different places

Neither vehicle is free. A listed REIT’s costs are internal. Operating expense, corporate overhead, and management compensation sit inside the earnings you are buying, netted out before the dividend is declared, with an expense ratio on top if you hold it through a fund. None of it is concealed, and none of it is broken out for you.

A private sponsor’s fees are itemised and taken at identified moments: a development fee when a project starts, construction management while it is built, property management as a share of revenue, asset management on invested capital, and a share of the profit above a preferred return at the end. A longer list is not automatically a more expensive one. What decides that is which fees are charged, on what base, and at which moment. Where a sponsor self-performs development, construction, and management, those fees stay inside one firm. Ours are not published here, because a fee schedule quoted away from its document drifts from it. Ask for the schedule, the offering documents that govern it, and what each fee line pays for.

Who is allowed to buy

Anyone with a brokerage account can buy a listed REIT. Private offerings like ours are open to accredited investors only, made under Rule 506(c) of Regulation D, which requires us to verify accredited status rather than accept a self-certification — in practice, documentation before you subscribe. The partners page states what follows from that.

What actually decides it

The deciding variables are not a return comparison. They are when you need the money back, whether you can meet a capital call on someone else’s schedule, what your own tax position does with a pass-through loss, and how much of your portfolio already moves with the equity market. Those are answerable questions. A ranking of the two instruments is not.

If you would rather work through it with someone who builds the buildings, our investor relations team will take the question directly.

Private real estate is illiquid and speculative. Interests in these offerings are not registered, are not freely transferable, and there is no public market for them. Projects are financed with debt, and leverage magnifies a poor outcome as reliably as a good one. Distributions are not guaranteed, may be reduced or suspended, and investors may lose some or all of their capital. Past results do not predict future results.