What is a non-traded REIT and how does it differ from a private REIT?

Non-traded and traded REITs share the same requirements for registration and reporting with the SEC. Non-traded REITs, however, are not traded on an exchange, which limits their liquidity.

The difference between non-traded and private REITs depends on the real estate objective. Private REITs are Regulation D private placement offerings, which do not require a public registration filing. The shares can only be purchased by accredited investors and typically offer the potential for larger overall returns.

What are some benefits of investing in non-traded REITs?

The primary benefit is diversification, enabling investors to avoid the correlation from investing their entire portfolios in capital markets-i.e., stocks and bonds. Even traded REITs demonstrate a very high correlation with the stock market. By contrast, non-traded REITs don't fluctuate according to market sentiment, but based on the actual value of the underlying real estate. Hence, non-traded REITs offer investors a hard asset, consisting of "sticks and bricks," with zero market correlation.

That's why their illiquidity can actually be a major advantage. Their share price is not going to fall in value overnight because of some economic news report from Fiji!

There is nothing inherently wrong with investing a small portion of a portfolio in illiquid vehicles, as long as the vast majority of one's assets are liquid and diversified.

Another advantage is that non-traded REITs usually pay higher dividends than their traded counterparts, but still must perform long term for their investors.

How about the disadvantages?

The illiquidity of the product means that investors cannot easily access their money in an emergency. The only liquidity options-share redemption programs-are completely controlled by the sponsor, whose board of directors can turn the program off at will. Plus,

the programs are extremely limited, often restricted to approximately 5% of the previous year's average outstanding shares. And they operate as "first come, first served," so there may be a waiting list.

Another drawback is that commissions are relatively high, typically running about 12%. The advisor receives the bulk of this, usually 7%. Because the client's investment is going to be tied up from three to 10 years, the advisor will not earn other commissions on that sum during that time. So it could be that the advisor ends up earning less in commission than many other investment vehicles provide, depending on the length of time before the dollars are free for new investments.

Monitoring non-traded REITs can be challenging in an industry that needs better awareness and transparency. Since non-traded REITs must file quarterly reports with the SEC, much information exists, but it is time-consuming to access. Blue Vault Partners is committed to plugging the hole for performing that research.

What is the profile of the typical non-traded REIT investor?

States and most broker-dealers issue suitability guidelines to govern investments in non-liquid products. As a result, investors need a fairly large portfolio of liquid investable assets of at least $400,000 per couple, although most investors will have a minimum of $700,000 to $800,000 in liquid assets. Investors tend to be older, because older investors are more likely to have the resources and appreciate the regular and higher dividend payouts.

What's your most important advice for advisors?

Know how long a REIT's sponsor has been active in both real estate and securities. Some non-traded REIT's investment and management teams have operated real estate for, say, 35 years, but may just be entering the

securities industry. This is cause for further due diligence. Advisors should know who is really running the company, who the board members are, the firm's track record and how well the company has historically performed, in real estate and on behalf of investors, based on a full reporting of past programs.

Advisors and investors should be fully educated on what they are buying and comfortable with the overall illiquid nature of the program in which they're investing. Investing in sticks and bricks is a long-term venture, and advisors must make certain investors understand that feature up front.


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