Private Real Estate Debt vs. REITs
By Sierra Davis, Principal & Fund Manager, Essential Income Fund I, LLCPublished Last reviewed
Short answer
A REIT is a company that owns real estate (an equity REIT) or real estate loans (a mortgage REIT), and many trade on stock exchanges with daily pricing and liquidity. Private real estate debt means lending against real property directly or through a private fund, usually with limited liquidity but income set by loan terms rather than a market price. The main trade-off is liquidity and simplicity versus price stability and a direct claim on specific collateral.
People ask me some version of this all the time: "Why wouldn't I just buy a REIT? It's real estate, it pays dividends, and I can sell it tomorrow."
That's a fair question. REITs are a legitimate way to own real estate exposure, and for a lot of investors they're the right tool. But a REIT and a private loan put you in very different seats. So before comparing yields, I'd start where I always start: where am I sitting in this deal?
What a REIT is
A real estate investment trust (REIT) is a company that owns or finances income-producing real estate. To keep its tax status, a REIT generally has to distribute most of its taxable income (at least 90%) to shareholders as dividends. There are two main kinds:
- Equity REITs own property, such as apartments, warehouses, offices, or data centers, and earn rent.
- Mortgage REITs (mREITs) own real estate loans or mortgage-backed securities and earn interest. They're the closer cousin to what I do.
Most investors buy publicly traded REITs through a brokerage account. Non-traded REITs also exist; they're sold privately, don't trade on an exchange, and usually have limited redemption options.
What private real estate debt is
Private real estate debt means being the lender on specific properties. You can do it directly, by buying or funding mortgage notes yourself, or through a private real estate debt fund whose manager buys, originates, and services the loans. Either way, the income comes from borrowers' payments, and each loan is secured by a recorded lien on real property.
Side-by-side comparison
| Private real estate debt | Mortgage REIT (public) | Equity REIT (public) | |
|---|---|---|---|
| What you own | A loan or a fund interest in loans | Shares of a company that owns loans or mortgage securities | Shares of a company that owns property |
| Income source | Borrower interest | Interest, minus the REIT's borrowing costs | Rent, minus operating and debt costs |
| Liquidity | Usually limited; set by note sale or fund terms | Daily, on an exchange | Daily, on an exchange |
| Price you see | Loan balance or fund value; no daily market price | Share price that moves with the stock market and rates | Share price that moves with the stock market and rates |
| Leverage | Varies; some funds borrow, some don't | Often significant at the company level | Common at the company level |
| Upside | Usually capped by loan terms | Limited; mostly income | Shares in property appreciation |
| Control and visibility | Direct: full control; fund: manager selects loans | Manager decides; holdings disclosed in public filings | Manager decides; holdings disclosed in public filings |
| Typical fees | Varies by fund; read the offering documents | Internal management costs plus any fund or brokerage fees | Internal management costs plus any fund or brokerage fees |
| Tax reporting | Varies by structure; funds often issue a Schedule K-1 | Usually Form 1099-DIV | Usually Form 1099-DIV |
| Minimum | Price of a note, or the fund's minimum | One share | One share |
| Who can invest | Many private funds are limited to accredited investors | Anyone with a brokerage account | Anyone with a brokerage account |
Liquidity cuts both ways
A public REIT's biggest advantage is that you can sell it in seconds. That's real. If there's any chance you'll need the money soon, that matters more than almost anything else in this article.
The cost of that liquidity is a price that moves every day. A REIT's share price reflects what the market thinks of real estate, interest rates, and stocks in general that day, not only how the underlying properties or loans are performing. A REIT can hold the same buildings and loans on Friday as on Monday and still be worth noticeably less.
Private debt doesn't get marked to a stock price every day. That doesn't mean the risk disappears. It means the value is tied to whether borrowers pay and what the collateral is worth, and you may have to wait to get your money out.
Leverage inside the REIT
This is the part I'd look at hardest with a mortgage REIT. Many mREITs borrow, often short term, to buy more loans or mortgage securities than their equity alone could buy. That can boost income when things are calm. When rates rise quickly or lenders pull back, the same borrowing can force a REIT to sell assets or cut its dividend.
Equity REITs usually carry mortgages or corporate debt too. Their shareholders sit behind those lenders, the same way syndication investors do. I walk through that line in real estate debt vs. syndications.
Control and what you can see
When you buy a REIT, you're trusting a management team with a large, diversified portfolio. You'll see public filings, but you won't decide which loans get made or which properties get bought.
When I buy a note directly, I can see the property, the payer, and the paperwork on that one loan before I wire a dollar. I check the loan-to-value, how long the borrower has been paying, and whether the documents are clean. In a private debt fund, you hand that work to a manager, so the questions shift to how the manager underwrites and what the fund's buy box is.
When a REIT may be the better fit
A REIT can be the better choice if you want daily liquidity, are investing smaller amounts, aren't an accredited investor, want broad diversification across many properties or loans, or prefer simple tax reporting in a regular brokerage or retirement account. Equity REITs also give you a share of property appreciation, which a lender doesn't get.
Private debt may fit better if you can hold for a set term, want income tied to contractual loan payments instead of a share price, and want to know exactly what collateral sits behind your money.
Questions to ask either way
- Am I the lender, an owner, or a shareholder in a company that is one of those?
- How much borrowed money sits ahead of me, and is it fixed or floating?
- How and when can I get my money out, and at what price?
- What fees are charged, at the fund level and inside the investment?
- How will this be reported at tax time? Ask your tax advisor how it fits your situation.
Frequently asked questions
Is a mortgage REIT the same as investing in real estate debt?
A mortgage REIT gives exposure to real estate debt, but investors own shares in a company rather than the loans themselves. The share price trades on an exchange and can move with the stock market and interest rates, and many mortgage REITs use significant borrowing to buy their loans or mortgage securities.
Are REITs more liquid than private real estate debt?
Publicly traded REITs are generally far more liquid, since shares can be sold on an exchange on any trading day. Private notes must be sold by negotiation, and private debt funds set their own redemption terms, which are usually limited. Non-traded REITs also tend to have limited liquidity.
How are REIT dividends taxed compared with private debt fund income?
REIT dividends are usually reported on Form 1099-DIV, while private debt fund income is reported according to the fund's structure, often on a Schedule K-1. How either is taxed depends on the investor's situation and account type, so investors should consult a tax advisor.
Why does a REIT's price fall when its properties are doing fine?
A public REIT's share price reflects market sentiment, interest rates, and broader stock market moves, not only the performance of its properties or loans. Rising rates in particular can push REIT prices down even when rents or loan payments are unchanged.
Do I need to be an accredited investor to invest in real estate debt?
Not always; anyone can buy a publicly traded mortgage REIT, and some investors buy individual notes directly. Many private real estate debt funds, including those offered under Rule 506(c), are limited to verified accredited investors. See accredited investor real estate investments.
This article is for educational purposes only and is not investment, legal, or tax advice. It describes general characteristics of real estate debt investments; individual investments differ, and all involve risk, including the possible loss of principal. Essential Investment Group, LLC is not a registered investment advisor, broker-dealer, or bank. Any offer of securities in Essential Income Fund I, LLC is made only through its Private Placement Memorandum to verified accredited investors under Rule 506(c) of Regulation D.