Private Equity or REIT: Which is a Smarter Senior Housing Investment
Private Equity or Public REIT: Which is a Smarter Senior Housing Investment Today?
One of the questions I hear most often as an equity fund manager in the senior housing sector is this: Which makes a smarter investment in senior housing—public REIT or private equity? In many ways, the answer depends on the investor. All things being equal, both public REITs and private equity funds provide an opportunity to capitalize on the unrelenting growth of our aging population in the coming decades. Each also holds its own distinct benefits and risks.
Only you as an investor can decide which investment—public REIT or private equity—will make the “right” senior housing investment for you. The following are a few questions to ask yourself to determine the answer:
Do you need tax benefits? While fund structures differ, a private equity fund may provide stronger tax benefits than public REITs because they offer passive gains and losses over the course of the fund. The returns made on public REITs, on the other hand, are generally taxed as ordinary income, which may impact your portfolio in different ways. That said, fund structures differ. For instance, we at Senior Living Fund offer an income fund that is taxed as ordinary income, and a 1031 Fund, which allows investors to move proceeds from one real estate investment into another to defer capital gains taxes. Discuss tax consequences with your financial planner—before deciding which investment will be most profitable for you.
What is your risk tolerance? Senior housing is a complex sector. It combines aspects of healthcare, hospitality, and commercial real estate all in one. Both public REITs and private equity allow investors to enter the senior housing marketplace with little knowledge of the industry itself. That said, by the mere fact they are publicly traded, public REITs typically have more layers of oversight built into their investment process, which is a positive for investors with low risk tolerance. On the other hand, because private equity funds are private, they usually have fewer layers of oversight and are better able to respond to changing market conditions. That means more risk, and more potential reward.
Do you need to diversify a stock-heavy portfolio? Because public REITs are traded on the public market, their performance may be more strongly linked to the market overall. Private equity funds, on the other hand, are considered alternative investments and may not be as strongly impacted by economic and political conditions. If you are stock heavy, investing in commercial real estate such as senior housing may be a smart way to diversify your portfolio. On the other hand, if you’re heavy on alternative investments, you may wish to focus on traditional investments.
Do you wish to invest solely in senior housing? There are few if any public REITs that focus solely on senior housing. Many focus on healthcare real estate in general, with senior housing filling some portion of the healthcare real estate portfolio. Those passionate about senior housing may find more fulfillment investing in a senior housing focused private equity fund.
How much do you have to invest? In general, private equity funds require a higher investment threshold than public REITs. On the flip side, they may also provide higher returns. Consider how much you have to invest comfortably before making your decision.
How long can you lock up your money? Because public REITs are traded on the open market, they are a liquid investment. On the other hand, private equity funds may require investment terms of five years or more. Are you able to lock up your investment for this period of time? Or will you need access to cash should an emergency arise? Consider all of these factors before making an investment.
When it comes to senior housing, there are plenty of strong investments to be had in today’s marketplace. The decision to invest in a public REIT or private equity fund is one that only the investor can make. I hope the above helped you understand the pros and cons of each. If you have any questions, please feel free to contact me at [email protected]