With a REIT, an investor commits money upfront before the properties are purchased and, most of the time, don’t know what properties they are invested in. REIT investors will evaluate the company’s general ability to perform, rather than a specific property’s future potential. In this sense, REITs are similar to stocks (and in some cases, they are available to invest in via the stock market).
The theory is an investor buys a diversified pool of properties, but in practice, REITs don’t start with a pool of properties, and they must start paying dividends to their investors. So, REIT managers have the propensity to invest in properties quickly to generate dividends to pay the investors. There is an immediate demand for returns that will need to be addressed—this can sometimes lead to firms making less than optimal investments.
On the other hand, an entrepreneur-run private equity Fund seeks property that provides all the conditions of a great investment, including cash flow, location, job growth, rent growth, and view of the future so an investor can exit with a profit. Investors’ funds will not be collected until a favorable deal is sourced, and then a capital call will be placed. Keeping this in mind, funds are generally considered to be less risky (and easier to forecast) than REITs.
Related: REIT vs Real Estate Fund: What You Need to Know