Understanding REITs: Public vs. Private

How REITs function and the key differences between trading them on an exchange versus private platforms.

Real Estate Investment Trusts, or REITs, are the crown jewel of the passive income world. Created by Congress in 1960, REITs were designed to allow the average person to invest in large-scale, income-producing real estate without needing millions of dollars in capital. Think of a REIT like a mutual fund, but instead of holding shares of Apple or Microsoft, the trust holds a portfolio of apartment complexes, shopping centers, hotels, or timberland. This chapter will provide a deep dive into understanding REITs and the critical differences between the public and private markets.

The Powerhouse Rule: The 90% Dividend Mandate

What makes a REIT such an incredible vehicle for income is a specific tax law. To qualify as a REIT, a company must distribute at least 90% of its taxable income to its shareholders in the form of dividends. Because the company pays out nearly all its profit, they are effectively "untaxed" at the corporate level, provided they meet this distribution requirement.

For you, the investor, this means a significantly higher yield than you would find in almost any other sector of the stock market. While a typical S&P 500 company might pay a 1.5% dividend, it is not uncommon for a high-quality REIT to pay between 4% and 7%.

Public REITs: The liquidity of the stock market

Publicly traded REITs are listed on major stock exchanges like the NYSE or NASDAQ. You can buy them through any standard brokerage account (like Schwab or Vanguard) using ticker symbols like O (Realty Income), PLD (Prologis), or AMT (American Tower).

The Pros: Instant Liquidity and Transparency

The biggest advantage of a public REIT is liquidity. If you buy shares on Monday and decide you need the cash on Tuesday, you can sell your shares with the click of a button. Furthermore, because they are public, they are subject to strict SEC reporting requirements. You can see exactly how much debt they have, their occupancy rates, and which tenants are paying the most rent.

The Cons: Market Volatility

The downside is that public REITs trade like stocks. Even if the underlying buildings are 100% occupied and the tenants are paying on time, the price of your shares might drop 5% in a day because of a broad market panic or a change in interest rates. This can be psychologically difficult for investors who want the "stability" of real estate.

Private and Non-Traded REITs: The stability of the bricks

Private REITs are not listed on public exchanges. You typically access these through specialized platforms like Fundrise or Streitwise.

The Pros: Low Correlation and "Price Smoothing"

Because these assets aren't traded daily on an exchange, their value is based on the appraised value of the properties, not market sentiment. This leads to "price smoothing"—your account balance won't bounce around as wildly as the stock market. This makes them an excellent diversifier, as they often stay stable when the stock market is "crashing."

The Cons: Illiquidity and Lock-up Periods

The stability comes at a cost: illiquidity. When you invest in a private REIT, your money is often "locked up" for a period of 3 to 5 years. If you have an emergency and need your cash, you might face heavy redemption fees or be unable to sell at all. Only invest money in private real estate that you are certain you won't need for several years.

FFO: The metric that actually matters

When analyzing a REIT, you must ignore "Net Income," which is the standard metric for most stocks. Because real estate companies have massive "depreciation" (an accounting expense that isn't actual cash leaving the building), their Net Income looks artificially low.

Instead, look for FFO (Funds From Operations).

FFO adds back that depreciation and subtracts the gains from property sales.
This gives you the truest measure of the actual cash flow the REIT is generating from its rents. A healthy REIT should have a "Payout Ratio" based on FFO of around 70-85%, ensuring they have a buffer for maintenance and future acquisitions.

Diversification across Real Estate Sectors

A major benefit of REITs is the ability to target specific sectors of the economy that you could never access as an individual.

Data Centers: Major trusts like Equinix (EQIX) own the buildings that house the physical servers for the internet and AI.
Logistics/Industrial: Companies like Prologis (PLD) own the warehouses that companies like Amazon and FedEx use to ship products.
Healthcare: Rent collected from hospitals and senior living facilities provides a highly "recession-resistant" income stream.
Retail: The "Triple Net Lease" models of companies like Realty Income focus on recession-proof tenants like 7-Eleven, Walgreens, and Dollar General.

Summary Checklist for REIT Selection

Is it Public or Private? (Do you need liquidity or do you prefer price stability?)
Is the FFO Payout Ratio sustainable? (Under 90% is mandatory; under 80% is ideal).
What is the sector focus? (Ensure you aren't 100% in a struggling sector like malls or urban offices).
How is the debt ladder? (Look for companies with low interest rates locked in for the next 5+ years).

In our next chapter, we will look at real estate crowdfunding platforms—the bridge between traditional REITs and direct property ownership.