Real estate investment trusts have become a core building block of diversified portfolios. But within the REIT universe, there is a meaningful divide between publicly traded REITs and their private, non-traded counterparts — and the differences extend well beyond where they trade. Liquidity, fees, tax treatment, and correlation to broader markets all vary significantly.
A Quick Refresher: What Is a REIT?
A REIT is a company that owns, operates, or finances income-producing real estate. Congress created the REIT structure in 1960 under the Real Estate Investment Trust Act to give everyday investors access to large-scale, income-producing real estate. To qualify as a REIT, a company must distribute at least 90% of its taxable income to shareholders as dividends, invest at least 75% of total assets in real estate, and derive at least 75% of gross income from rents, mortgage interest, or real estate sales. In exchange, the REIT itself pays little to no corporate-level income tax — the tax obligation passes through to shareholders.
According to the National Association of Real Estate Investment Trusts (Nareit), as of mid-2024 there are approximately 225 publicly traded REITs in the United States with a combined equity market capitalization exceeding $1.3 trillion. Private and non-traded REITs add hundreds of billions more in assets under management, though precise figures are harder to pin down due to limited reporting requirements.
The Core Differences at a Glance
| Factor | Public REITs | Private / Non-Traded REITs |
|---|---|---|
| Liquidity | Trade on major exchanges (NYSE, NASDAQ); can buy or sell any trading day | Limited or no secondary market; redemptions often capped at 2–5% of NAV per quarter |
| Minimum Investment | Price of a single share (often $15–$200) | Typically $2,500–$25,000; some institutional vehicles require $100K+ |
| Fees | Expense ratios of 0.08%–0.60% for REIT ETFs and mutual funds | Upfront selling commissions (0–6%), management fees (1–1.5%), performance fees; total cost can exceed 3%/yr |
| Valuation | Real-time market pricing; reflects daily investor sentiment | Appraised quarterly or annually by the sponsor; NAV is estimated, not market-tested |
| Volatility | Correlated with equity markets; can swing 20–40% in a drawdown year | Reported volatility is lower, but largely due to infrequent appraisal-based valuations |
| QBI Deduction | Eligible — 20% deduction on ordinary REIT dividends under Section 199A | Eligible — same 20% deduction applies; some structures may enhance pass-through income |
| Correlation | 0.50–0.70 correlation to S&P 500 over rolling 5-year periods | Reported correlation is lower (~0.10–0.25), but reflects stale pricing, not true diversification |
| Transparency | SEC-registered; quarterly 10-Q/10-K filings; analyst coverage | Limited reporting; fewer disclosure requirements for non-traded vehicles |
Liquidity: The Most Important Difference
For most investors, liquidity is the single most consequential distinction. A publicly traded REIT can be sold during market hours with settlement in one business day. A non-traded REIT, by contrast, typically imposes a lockup period of 3–7 years before any redemptions are permitted, and even after the lockup expires, quarterly redemptions are commonly capped at 2–5% of the fund’s net asset value.
This matters in practice. In late 2022 and early 2023, several of the largest non-traded REITs — including Blackstone’s BREIT — hit their redemption caps and had to gate investor withdrawals. Investors who needed liquidity were unable to exit at any price. The episode highlighted a structural reality: non-traded REIT liquidity exists on paper but can evaporate precisely when investors want it most.
Fees and Total Cost of Ownership
The fee differential is substantial. A Vanguard Real Estate ETF (VNQ) carries an expense ratio of 0.12%. A typical non-traded REIT may charge an upfront selling commission of 3–6%, an annual management fee of 1.0–1.5%, plus a performance fee (often 12.5–20% of returns above a preferred return hurdle). All-in, the total cost can exceed 3% annually.
Over a 10-year holding period, a 2.5% annual fee differential compounds dramatically. On a $500,000 allocation earning 8% gross, that fee gap amounts to roughly $175,000 in lost terminal wealth. Fee-conscious investors need to ask whether the private structure genuinely delivers enough incremental return to overcome this drag.
The QBI Deduction: A Tax Advantage for Both
The Tax Cuts and Jobs Act of 2017 introduced the Section 199A qualified business income (QBI) deduction, which allows eligible taxpayers to deduct up to 20% of qualified REIT dividends from their taxable income. This deduction applies to both public and private REITs — it is tied to the REIT structure, not the trading venue.
For a high-income investor in a 37% federal bracket receiving $50,000 in ordinary REIT dividends, the 20% QBI deduction reduces the taxable amount to $40,000 — saving $3,700 in federal tax. The effective tax rate on those REIT dividends drops from 37% to approximately 29.6%.
Important caveats: the QBI deduction is scheduled to expire after December 31, 2025, unless Congress extends it. Capital gain distributions from REITs do not qualify for the QBI deduction — only the ordinary income portion. And investors above certain income thresholds ($364,200 for married filing jointly in 2024) may face additional limitations depending on the type of REIT income. Consult the IRS guidance on Section 199A for current thresholds and rules.
QBI in Practice: Private REITs vs. Public REITs
Both public and private REIT dividends generally qualify for the 199A deduction, allowing investors to deduct up to 20% of qualified REIT income. For an investor in the 37% federal bracket, this effectively reduces the tax rate on REIT dividends from 37% to roughly 29.6% — a meaningful difference on six- and seven-figure distributions.
However, private REITs often deliver a higher proportion of their returns through income (versus price appreciation), which means the QBI deduction has a proportionally larger impact on total after-tax returns. This is one reason we consider private REITs alongside DST structures and Qualified Opportunity Zones as part of a broader tax-advantaged real estate allocation.
Tax Efficiency: Dividends, Return of Capital, and Depreciation
REIT dividends are generally taxed as ordinary income (not at the lower qualified dividend rate), which makes them less tax-efficient than equity dividends in taxable accounts. However, a significant portion of REIT distributions — often 20–40% for well-managed REITs — is classified as return of capital (ROC), which is not taxed in the year received. Instead, ROC reduces your cost basis, deferring tax until you sell the shares.
Private REITs sometimes distribute a higher percentage of ROC because the underlying properties generate substantial depreciation deductions that flow through to investors. This can create a meaningful tax-deferral advantage in the near term, though it does not eliminate the tax — it defers it to the point of sale.
For investors in high tax brackets, holding REITs in tax-advantaged accounts (IRAs, 401(k)s) is often the most efficient approach. When REITs must be held in a taxable account, the QBI deduction and ROC components help offset the ordinary income treatment, but asset location planning should always be part of the conversation.
Volatility and Correlation: Appearance vs. Reality
Non-traded REIT sponsors frequently market lower volatility and lower correlation to equities as key selling points. The data appears to support this — non-traded REITs typically show reported standard deviations 40–60% lower than public REITs.
But this is largely an artifact of appraisal-based valuations. Public REIT prices adjust in real time to reflect interest rate expectations, credit conditions, and property market sentiment. Non-traded REIT NAVs are updated quarterly by the sponsor’s internal or third-party appraisers. The underlying real estate has the same economic exposure — the difference is purely how often the ruler is applied.
Academic research, including work by Jeffrey Fisher and David Geltner at MIT’s Center for Real Estate, has demonstrated that when private real estate returns are “unsmoothed” to approximate true market pricing, the volatility closely matches that of publicly traded REITs. The low-correlation story, in other words, is substantially a measurement illusion.
Sponsor Selection: The Most Important Decision
In private real estate, the sponsor — the firm that sources, manages, and operates the properties — matters more than the asset class itself. A well-run sponsor with disciplined underwriting and experienced property management will navigate market cycles; a poorly capitalized or inexperienced one will amplify losses. This is why sponsor due diligence is the centerpiece of our evaluation process.
We evaluate sponsors across multiple dimensions: track record through prior downturns, alignment of interest (how much of their own capital is invested alongside clients), fee transparency, redemption policies, property-level reporting quality, and organizational depth. When warranted, we attend sponsor due diligence meetings in person — sitting across the table from the management team to understand how they underwrite risk, manage leverage, and plan for adverse scenarios. There is no substitute for knowing the people behind the investment.
Diversification by sponsor — not just property type
We deliberately diversify across sponsors and do not overallocate to any single manager, regardless of track record. Concentration risk applies to sponsors just as it does to stocks. A portfolio spread across three or four carefully vetted sponsors — each with different property-type expertise, geographic focus, and capital structure — is materially more resilient than one concentrated in a single fund, no matter how strong that fund's historical returns.
Illiquidity: The Risk That Doesn't Show Up in a Prospectus
Private REITs are illiquid investments. That's not a footnote — it's the defining characteristic. Unlike public REITs that trade on an exchange, private REIT shares cannot be sold freely. Redemption is governed by the fund's policies, which typically include quarterly windows, volume limitations, and the ability to suspend redemptions entirely during periods of market stress.
We saw this play out in 2022-2023, when several prominent non-traded REITs gated or limited redemptions as investor requests exceeded available liquidity. Investors who expected to access their capital on demand discovered that "quarterly liquidity" means "quarterly liquidity subject to the manager's discretion."
This is precisely why we size private REIT allocations carefully, diversify across sponsors, and only recommend these vehicles for capital that clients genuinely do not need for 5-7 years or longer. Illiquidity is not inherently bad — it's the source of the return premium. But it must be matched to the client's actual liquidity profile, not their optimistic assumptions about when they'll need the money.
When Does a Private REIT Make Sense?
Despite the drawbacks, there are scenarios where a non-traded or private REIT structure may be appropriate:
- Behavioral discipline. For investors who struggle with the temptation to sell during public market drawdowns, the illiquidity of a private REIT effectively removes the sell button. This can prevent destructive market-timing behavior.
- Access to specialized strategies. Some private REITs focus on niche property types — data centers, cold storage, medical office buildings, single-family rental portfolios — that may not be well-represented in public REIT indices.
- Higher current yield. Private REITs sometimes offer higher stated distribution yields than public REITs, though investors should always verify whether those distributions are funded by operating income or by return of capital and leverage.
- Institutional-quality sponsors. Vehicles from firms like Blackstone, Starwood, and KKR offer access to institutional-grade real estate portfolios that individual investors could not assemble independently.
The Case for Public REITs
For most investors, and particularly those who value transparency, liquidity, and low costs, publicly traded REITs are the more practical choice:
- Immediate liquidity — sell any trading day without redemption gates or lockup periods
- Low cost — REIT ETFs and index funds charge a fraction of what non-traded vehicles charge
- Full transparency — SEC filings, analyst coverage, and real-time pricing give investors a clear view of what they own
- Same QBI deduction — the 20% Section 199A deduction applies regardless of whether the REIT is public or private
- Proven long-term track record — the FTSE Nareit All Equity REITs Index has delivered an annualized total return of approximately 10.6% since its inception in 1972, outperforming bonds and holding its own against equities (past performance is not indicative of future results)
The Bottom Line
REITs — both public and private — are a valuable component of a diversified real estate allocation, but they're not interchangeable. The right choice depends on your liquidity needs, tax situation, time horizon, and tolerance for opacity. For many UHNW investors, a blended approach works best: public REITs for liquid exposure and tactical flexibility, private REITs for income and QBI advantages, sized appropriately and diversified across vetted sponsors.
REITs also fit within a broader real estate strategy that may include directly held properties, DST and 1031 exchanges for tax deferral, and Qualified Opportunity Zones for capital gains exclusion. The key is integrating all of these vehicles into a single, coordinated plan — not accumulating them in isolation.
