Ditch the Duplex: Why Public Real Estate Investing Crushes Private Deals
You don't need a hard hat and a toolbox. For those with a desire to learn, the public markets offer a more profitable path to real estate wealth without the headaches of being a landlord.
My real estate journey began in 2015 as a loan officer at a national lender. My professional experience quickly sparked a personal passion for real estate, and I began acquiring properties, purchasing my first home in 2016, followed by additional properties in 2017 and 2018.
Recognizing the challenges of scaling a portfolio with personal capital alone, I began learning about real estate syndications. This led to my involvement in various large multifamily deals as both a general and limited partner. In 2019, I started a house-flipping company with a partner, and my strategy was to strategically reinvest the profits into these multifamily syndications as a limited partner.
This approach was highly tax-efficient. By qualifying as a "real estate professional" for IRS purposes, I was able to use the accelerated depreciation from the syndications to offset the ordinary income generated from flipping houses. This allowed me to create significant wealth while paying minimal taxes. As these syndicated assets were sold, I would roll the proceeds into new deals, compounding my returns.
In 2022, I pursued a few commercial real estate ventures with a partner and a group of limited partners. While we still own a wedding venue and a boutique motel, this experience clarified that my strengths are better suited to being a limited partner. This realization led me to launch a real estate fund in late 2023 with the goal of identifying and backing exceptional operators.
Since then, the fund has already made a number of promising investments, including a partnership with a terrific group on two new, Class-A built-to-rent (BTR) multifamily deals in early 2024.
Discovering public markets was like waking up from the Matrix
Around this same time in early 2024, I pooled about $300-400k in a small family fund made up of my money and a couple immediate family members. My goal was to look at micro-cap companies in the public markets to invest in.
After doing this for a few months, I stumbled on a very interesting situation. It was a liquidating trust formed in connection with JC Penney’s bankruptcy filing in 2020. In essence, the trust was tasked with liquidating about 160-170 properties owned by JC Penney. By the time I saw this in June 2024, they owned about 130 properties.
The trust was debt-free, owned about 130 retail properties with a 20-year NNN master lease to a well-capitalized post-bankruptcy JC Penney operating company. When we started buying it was trading at a price that gave us a yield north of 12%, solely from the lease income.
On a cap rate basis, it was trading in the 13-14% range based on the price. And meanwhile, they were selling properties in the 6-8% cap rate range and distributing the proceeds. In 5 minutes I realized this was a rare opportunity that would be tough to not make money on.
The issue was that the small family fund I intended to use for public equities was fully invested, so I didn’t have any available funds to invest.
Then the lightbulb went off and I realized this is a real estate deal that I can invest in via my real estate fund.
That is when I woke up from the Matrix and realized that for someone like myself, who dislikes operating real estate, the public markets are vastly superior to anything that can be found in the private markets.
We’ve fully exited that position and while it underperformed my expectations, it yielded a compound annual return of 41.40%. Even though that one was well below where I expected, returns like that are unfathomable in private real estate as a limited partner.
If we slice off the portion of my fund that is solely invested in public real estate since we began doing it around July 2024, and include cash, which drags down returns, our total return is 58.23% and CAGR is 48.30%.
Again, there is no possible way we would be able to come close to achieving returns like that by investing in private real estate. Unless we got insanely lucky in some way there’s simply no ability to do that over the long term.
Now, I of course don’t think we will sustain those returns. But the public markets offer us the best chances of beating the market for a few reasons.
Why public markets offer superior real estate investments
I’ve now concluded that unless a private real estate deal appears to be an absolute home run, it makes much more sense to focus on finding opportunities in the public markets. My belief that public markets are more fertile than private markets is based on:
Deal flow – The more opportunities explored, the more selective you can be, ultimately leading to stronger performance. Public markets offer an almost limitless universe of potential investments, a stark contrast to private deals, which are constrained by your network and its current offerings. For those with endless curiosity like myself, you will never get bored looking through the public markets for deals.
Liquidity - Public investments offer liquidity. Private investments do not. This liquidity offers the ability to do a few things. For one, I personally feel much more comfortable borrowing against a liquid portfolio versus an illiquid one. To that end, I have secured a line of credit for our fund (minimal leverage – less than 30% debt to equity) that I’ve been using to lend funds out as hard money loans secured to real property.
We're currently borrowing at around 7% and lending in the mid to high teens, generating a healthy arbitrage. More importantly, this allows us to “have our cake and eat it too” in that we can generate interest income without tying up capital that could be used for equity investments as they come along. I would never dream of getting a line of credit secured to private investments, as the lack of liquidity seems very risky.
Another benefit of liquidity is that it allows us to move into better opportunities with minimal friction. If we are fully invested in a portfolio of private real estate, there is nothing we can do should a more attractive opportunity come along as we have no access to liquidity. On the other hand, if we are fully invested in a portfolio of publicly traded real estate, we can simply allocate capital to better opportunities as they come up.
Transparency - There are stringent rules surrounding all the information that must be disclosed on an ongoing basis by public real estate companies, including their financials, debt levels, loan maturities, lease information, etc. This is not the case with private companies. The transparency allows you to make much more informed decisions than private deals, which can be a black box depending on the sponsor’s ability to provide good updates.
Inefficient markets - Being able to buy in inefficient markets provides a huge benefit and if you focus on smaller companies (less than $1 billion market cap) you will find inefficiently-priced opportunities from time to time.
No landlord-related headaches - This will resonate with anyone who’s had a bad experience with a property. By investing through public markets, you don’t have to worry about tenants, broken pipes at 3am, lenders, and all the brain damaging things that go along with owning real estate. To me, that is a beautiful thing!
If you have experience in the private real estate world like I did, I believe you have a massive advantage as most public investors and fund managers do not. My goal is to simply exploit the gap between public and private real estate valuations. Seeking out catalyst-driven situations such as that JC Penney deal I mentioned above is what I’m now focused on.
My belief is that for the intellectually curious real estate investor that does not want to manage real estate but would still like exposure to it, public real estate investing is the way to go.
Important: This information is for general purposes only and is not financial advice. Always seek professional guidance for investment decisions.