Are Non-Traded REIT Right for You?

What are “Non-Traded REITS”?  These are real estate investment trusts very similar to their publicly traded counterparts.  Non-traded REITs are not available to all investors and are usually sold by financial advisors and broker-dealers. Non-traded REITs have some basic differences from listed REITs in their commissions and sales fees ranging from about 7% to 15% and in their average yield of 6.7% vs a listed average of 3.3%. 

From a 2012 Forbes article, “Non-Listed REITS continue to be an excellent source of hard-asset investing for suitable investors,” says Investment Program Association (IPA) CEO and President Kevin Hogan. “Meant to be held for the long term, these products provide significant benefits, including true portfolio diversification, to the retail investor who typically would not have access to such options.” Hogan adds, “the structure and lifecycle of these products allow you and I the unique opportunity to invest in office buildings, medical facilities or retail malls, managed by world class real estate firms. This design is a significant value proposition of these products. There is no better time for investors to consider adding these products to their portfolios than now.”

Collectively, non-traded REITs represent about $100 billion in investor assets vs. its traded brethren with about $500 billion in investor assets. 

There are 63 non-traded and private REITs listed on NARIET website as Association members (with links to each home page) and the list is found here:

FINRA offers an article on the pitfalls of non-traded REITS and it can be found here:

Below is a list of the difference between non-traded REITs (NTR) and exchange traded REITs (ETR) from this article:

Listing Status

NTR - Shares do not list on a national securities exchange.

ETR - Shares trade on a national securities exchange.

Secondary Market

NTR - Very limited. While a portion of total shares outstanding may be redeemable each year, subject to limitations, redemption offers may be priced below the purchase price or current price.

ETR - Exchange traded. Generally easy for investors to buy and sell.

Front-End Fees

NTR - Front-end fees that can be as much as 15% of the per share price. Those fees include selling compensation and expenses, which cannot exceed 10%, and additional offering and organizational costs.

ETR - Front-end underwriting fees in the form of a discount may be 7% or more of the offering proceeds. Investors who buy shares in the open market pay a brokerage commission.

Anticipated Source of Return

NTR - Investors typically seek income from distributions over a period of years. Upon liquidation, return of capital may be more or less than the original investment depending on the value of assets.

ETR - Investors typically seek capital appreciation based on prices at which REITs’ shares trade on an exchange. REITs also may pay distributions to shareholders.

Also from the FINRA article, “Private REITs - There is another type of REIT—a private REIT, or private-placement REIT—that also does not trade on an exchange. Private REITS carry significant risk to investors. Not only are they unlisted, making them hard to value and trade, but they also generally are exempt from Securities Act registration. As such, private REITs are not subject to the same disclosure requirements as public non-traded REITs. The lack of disclosure documents makes it extremely difficult for investors to make an informed decision about the investment. Private REITS generally can be sold only to accredited investors, for instance those with a net worth in excess of $1 million. As with any private investment, it is a good idea to have the investment reviewed by an investment professional who understands the product and can offer impartial advice.”

For most investors, sticking with the diversity of publically traded REITs would be recommended.  Non-traded and private REITs are fraught with investment pitfalls that can be avoided by utilizing their more transparent brethren.

Disclosure: No positions

I appreciate your time and interest in Guiding Mast Investments, George Fisher