Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / Wealthy Families Using Private REITs for Steady Income
Transcript
- Lucas: Luna, I've been looking at how a lot of the families we talk to are quietly shifting a piece of their allocation away from public REITs into private REITs — the unlisted kind. And the number that caught my eye was this: private REITs now hold about a hundred and twenty billion dollars in assets, up from roughly eighty billion just three years ago. That's a fifty percent increase. Luna: That's a big move. But isn't the conventional wisdom that private REITs are less liquid and have higher fees? Why are high-net-worth families leaning in? Lucas: Those criticisms are fair — liquidity is definitely a trade-off. But the appeal is the income stability. Public REITs get whipsawed by interest rate headlines and market sentiment. The average public REIT this year is down about seven percent on a total return basis, while a lot of private REITs in the industrial and net-lease space are still distributing five and a half to six and a half percent, with minimal principal volatility. Luna: So the trade is basically: give up daily liquidity, get a smoother ride and a predictable yield. Lucas: Exactly. And for a family that doesn't need to access that capital in the next three to five years, it can be a very attractive core holding. Let me walk through a specific case. I was talking to a family office in Chicago — about fifty million in assets — and last quarter they put two million into a private industrial REIT focused on last-mile logistics properties. The REIT was targeting a six and a half percent annualized distribution, paid monthly. That's about ten thousand eight hundred dollars a month in income — not life-changing for them, but it's a very stable income stream that doesn't require them to worry about what the Fed says at the next FOMC meeting. Luna: And ten thousand a month on two million — that's a six and a half percent yield. But how much of that is return of capital versus actual earnings? Lucas: Great question. In private REITs, a portion of the distribution is often return of capital, which actually gives the investor a tax deferral benefit. The distribution itself is taxed more favorably than ordinary income — mostly at the qualified dividend rate once you account for the return of capital component. For a family in the top tax bracket, that can make the effective after-tax yield significantly higher than a bond yielding the same nominal number. Luna: Right, because the return of capital piece isn't taxed until you sell, and then it's usually capital gains treatment. So the tax efficiency is a big part of the math. Lucas: It is. And that's one reason private REITs have become a staple for the high-net-worth set. But there's a nuance: not all private REITs are created equal. The sponsor quality matters enormously. Some of the larger ones — like Blackstone's BREIT or Starwood's private REIT — have very institutional-grade portfolios and fee structures that have come down over time. But there are also smaller sponsors with higher leverage and less diversified portfolios. Luna: So when you looked at that Chicago family office allocation, how did they pick the sponsor? Lucas: They focused on three things. First, the debt maturity profile — they wanted a sponsor with no major refinancing needs until at least 2028. Second, the occupancy rate across the portfolio — this fund was at ninety-seven percent. And third, the distribution coverage ratio. The REIT was generating about one point one times coverage from net operating income, meaning the distributions were well covered by actual cash flow, not from new capital. Luna: One point one times coverage — that's not a huge cushion, but it's adequate. And it's better than some of the office-focused private REITs that are struggling. Lucas: Right. Office is a different story. A lot of private office REITs have had to suspend or reduce distributions because of the hybrid work shift. But industrial, self-storage, and net-lease retail have held up well. The key is that the private structure allows the manager to avoid forced selling during market dislocations, which is exactly what happened in 2020 — public REITs had to mark down assets and some sold at distressed prices, while private REITs just rode through the volatility. Luna: And that's the core advantage: no daily mark to market, no redemption pressure from panicking investors — well, at least not the same kind. Although private REITs do have redemption programs, right? Lucas: They do, but they're limited. Most allow you to redeem a small percentage of your shares each quarter — typically two to five percent of the fund's net asset value. And they can suspend redemptions entirely if too many people ask at once. That happened with BREIT in late 2022 and 2023, when they limited redemptions to preserve liquidity. So the liquidity risk is real. Investors need to understand that this is truly a long-term hold. Luna: For a listener who's thinking about this — what's the minimum check size? Is this something only for the ultra-wealthy, or can a high-net-worth individual with, say, a million dollars get in? Lucas: The minimums vary widely. Some of the big institutional private REITs require a minimum of twenty-five thousand or fifty thousand, but there are also interval funds and tender-offer funds that are structured similarly and have lower minimums. For example, some of the non-traded REITs available through broker-dealers have minimums as low as two thousand five hundred. And they're available to accredited investors. So it's not just for the ultra-wealthy, but you do need to be an accredited investor — meaning a net worth above a million excluding your primary residence, or income above two hundred thousand for the last two years. Luna: And the fees? That's the other big knock on private REITs — the expense ratios are higher than public REITs. Lucas: They are. A typical public REIT has an expense ratio around one percent or less. A private REIT can be one and a half to two percent, and there are often upfront selling commissions and dealer-manager fees that can add another two to three percent. So the total cost of entry is higher. But proponents argue that the smoother returns and lower volatility compensate for that. And some of the larger sponsors have been reducing fees in recent years to stay competitive. Luna: So it's not a slam dunk. It's a trade-off: higher costs and less liquidity in exchange for income stability and tax efficiency. Lucas: Exactly. And it's important to look at the net return after fees, not just the headline yield. The Chicago family I mentioned — they net about five and a half percent after all fees, which is still attractive in a world where the ten-year Treasury is yielding around four percent. And they get that tax deferral on top. Luna: You know, this conversation reminds me that a lot of listeners might be hearing this and thinking, 'Okay, this is useful — I didn't know the mechanics behind private REITs.' And that's exactly the kind of content we want to keep bringing you. If you find value in these deep dives, the way we keep the show ad-free and independent is through listener support. If you're able, you can contribute at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. No pressure, just a simple way to support the show if it's helped you make better decisions with your money. Lucas: Yeah, we really appreciate those who can throw a few dollars in the hat. It directly keeps us from having to run ads or sell your data. So thank you. Luna: Alright, back to the allocation. Lucas, you mentioned net-lease retail as one of the sectors doing well. Can you give an example of what that looks like? Lucas: Sure. Net-lease means the tenant is responsible for property taxes, insurance, and maintenance — so the landlord's expenses are very low. Think of a private REIT that owns a portfolio of Dollar General stores or auto-parts chains like O'Reilly. Those are typically on long-term leases with built-in rent escalations. The yield might be around five and a half to six percent, but because the landlord has almost no expenses, the cash-on-cash return can be quite attractive. Luna: And those tenants are generally investment-grade or near investment grade, so the credit risk is manageable. Lucas: Right. But you have to watch for concentration risk. Some private REITs are heavily concentrated in a single tenant or a single geography. The better ones are diversified across dozens or hundreds of tenants, and across multiple states. Luna: So for a listener who's considering adding private REITs, what's your top piece of advice? Lucas: Don't chase yield. If a private REIT is offering eight or nine percent, there's a reason — usually higher leverage, lower-quality assets, or both. Stick with the sponsors that have been around for at least ten years, have a track record through multiple cycles, and are transparent about their portfolio holdings and valuations. And think of it as a long-term allocation: at least five years, ideally longer. Luna: Sound advice. And with interest rates potentially coming down in the next year, private REITs could see a tailwind as cap rates compress and asset values stabilize. Lucas: That's the bull case. If we get a couple of rate cuts in late 2026 and into 2027, the cost of financing for these REITs goes down, and the spread between their yields and risk-free rates widens. That could make the current yield even more attractive on a relative basis. But even without that, for a family that needs steady income and can handle the illiquidity, private REITs are a tool worth understanding. Luna: Alright, Lucas. Let's leave our listeners with one concrete number to remember. Lucas: A hundred and twenty billion dollars. That's the size of the private REIT market today — and growing. It's no longer a niche. It's a core part of how high-net-worth families build durable income.