- Publicly traded REITs can be highly liquid, private funds are generally illiquid, often locking capital up for years
- REITs must distribute at least 90 percent of taxable income to shareholders, private fund distributions depend entirely on fund strategy and governing documents
- Neither structure is automatically riskier, both carry meaningfully different types of risk, market volatility for REITs, illiquidity and manager risk for private funds
- Whether private funds outperform public REITs on average is genuinely mixed in financial research, not a settled question either way
- Avestor can help fund managers centralize investor onboarding, capital calls, and reporting for private real estate funds
Real estate investors have several ways to gain exposure to property and real estate-related assets. Two common structures are Real Estate Investment Trusts and private funds. Although both can provide access to real estate investments, they differ significantly in structure, liquidity, investor access, management, fees, and risk. A REIT is generally a company or trust that owns or finances income-producing real estate, while a private fund is a privately offered investment vehicle pooling capital from eligible investors according to a defined strategy.
REIT vs Private Fund at a Glance
| Feature | REIT | Private Fund |
|---|---|---|
| Investor access | Can be broad for publicly traded REITs | Generally limited to eligible investors |
| Liquidity | Public REITs can be highly liquid | Usually limited |
| Investment strategy | Often focused on real estate assets | Real estate, debt, credit, or other assets |
| Distributions | Often income-focused, 90% distribution rule | Depends on fund strategy and waterfall |
What Is a REIT?
A Real Estate Investment Trust, or REIT, is an entity designed to own, operate, or finance income-producing real estate or related assets, apartment buildings, office properties, retail centers, industrial facilities, hotels, healthcare properties, and mortgage-related assets. Publicly traded REITs can be bought and sold through brokerage accounts much like shares of other public companies, though non-traded and private REIT structures also exist, so not every REIT provides the same level of liquidity or investor access.
What Is a Private Fund?
A private fund is an investment vehicle that pools capital from a group of investors and invests according to a predetermined strategy, real estate, private equity, venture capital, private credit, mortgage lending, or other alternative asset classes. A private real estate fund might raise capital and use it to acquire apartment buildings, commercial properties, or development projects. The fund is generally managed by a sponsor or General Partner, while investors commonly participate as Limited Partners.
Investor Access and Liquidity
One of the biggest differences is who can invest, publicly traded REITs can be accessible to a broad range of investors through public markets, while private funds are generally offered privately with eligibility requirements depending on the offering structure and applicable securities laws. Liquidity follows a similar pattern, publicly traded REIT shares can generally be bought and sold during market hours, while private funds are generally less liquid, investors may need to hold their investment for several years before receiving capital back, though some open-end or evergreen private funds may offer periodic redemption opportunities defined by the fund's governing documents.
Investment Strategy and Fees
REITs and private funds can both invest in real estate, but strategies can differ significantly, a REIT may focus on a specific property sector, while a private fund can have a much more customized mandate, focusing exclusively on undervalued multifamily properties, development projects, or lending to real estate developers. Fee structures also differ, REIT expenses are generally reflected in company financial performance and share price, while private funds commonly use a combination of management fees, fund expenses, and performance-based compensation such as carried interest, the exact structure should always be reviewed in the relevant offering documents.
How Investors Make Money
REIT investors may generate returns through dividends and appreciation in share value, with public REIT prices fluctuating based on property performance, interest rates, and market sentiment. Private fund investors may generate returns through rental income, interest income, property appreciation, asset sales, refinancing, and other strategy-specific distributions, with timing and amount depending on the fund's investment strategy and governing documents.
Risk Considerations
Neither structure is automatically safer. REIT investors may face market volatility, interest-rate risk, real estate market risk, sector concentration, and leverage risk. Private fund investors may face illiquidity, investment concentration, manager risk, valuation uncertainty, and limited ability to exit early. Private investments may also have less frequent market-based pricing than publicly traded securities, that doesn't necessarily mean they're less risky, it means investors may receive less frequent observable market pricing.
Operational Considerations for Private Funds
Private funds require substantial operational infrastructure, systems for investor onboarding, KYC and AML workflows, subscription documents, capital calls, distributions, investor reporting, fund accounting, and tax documentation. As the number of investors and investments increases, managing these processes manually can become increasingly difficult. Avestor can help fund managers centralize these workflows and create a more efficient experience for both managers and investors.
Which Is Better: REIT or Private Fund?
There's no universal answer. A REIT may be more suitable for an investor prioritizing liquidity, simpler access to real estate exposure, and public-market transparency. A private fund may be more suitable for an eligible investor seeking access to private-market opportunities, specialized investment strategies, and exposure to strategies not readily available through public REITs. The right choice depends on an investor's objectives, risk tolerance, liquidity needs, investment horizon, and eligibility.
Authoritative Resources
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Frequently Asked Questions
Final Thoughts
- The key difference between a REIT and a private fund comes down to structure, access, liquidity, investment strategy, and management.
- REITs provide relatively accessible exposure to real estate, particularly when publicly traded, private funds provide a more customized, specialized structure for eligible investors.
- Neither is automatically safer or better, the right choice depends on individual objectives, liquidity needs, and risk tolerance.
- For fund managers, having efficient operational infrastructure becomes critical as private investment strategies become increasingly specialized.
- Avestor can help build the operational infrastructure necessary to manage a private fund effectively, per its About page.