What are non-traded REITs?
Updated: August 13, 2024
Non-traded REITs are real estate investment trusts that aren’t listed on public stock exchanges. They pool investor funds to buy and manage real estate properties or invest in real estate-related assets, similar to publicly traded REITs. But, because they aren’t traded on public exchanges, they offer less liquidity compared to their publicly traded counterparts.
Non-traded REITs are not easily bought or sold on public markets, which means investors may need to hold their investment for several years until a liquidity event occurs, such as a public offering or property sale. Their focus on dividends, which are often derived from rental income or interest on real estate loans, is attractive to investors. But they’re definitely not for everyone, evidenced by the fact that these REITs make up a relatively 1small fraction of the total investments in the US.
Quick REITS recap
What is a REIT?
A REIT (Real Estate Investment Trust) is a company that owns, operates, or finances income-producing real estate.
What is a non-traded REIT?
A non-traded REIT is a real estate investment trust not listed on public exchanges, offering less liquidity but potential income.
What is a private REIT?
A private REIT is a real estate investment trust not registered with the SEC and not traded on public exchanges.
Non-traded REITs 101
Much can be made of these investments from their name. A REIT is a Real Estate Investment Trust, or a type of investment vehicle which buys and holds real estate – commercial REITs or residential REITs – for rental income and appreciation. A REIT is a tax-advantaged entity which is required by law to pay out 90% of its earnings in the form of distributions or dividends.
Investors like REITs for their high yields (virtually all income is returned in monthly, semi-annually or annual payouts) and consistency. However, non-traded REITs differ from most REITs in that they are not listed on a public exchange like the NYSE or NASDAQ marketplace. Non-traded REITs are instead sold on an illiquid secondary market between individual brokers, meaning they can be much more difficult to buy or sell.
How liquid are non-traded REITs?
Non-traded REITs are generally more difficult to sell for cash. Unlike publicly traded REITs, they are not listed on stock exchanges, making them difficult to buy or sell quickly. Investors typically need to hold their shares for several years until a liquidity event, such as a public offering or a property sales. Redemption programs, if available, are often limited and may impose penalties for early withdrawal, further restricting liquidity.
Are non-traded REITs SEC registered?
Non-traded REITs are typically registered with the SEC, ensuring some regulatory oversight and transparency. Despite this registration, however, they are not listed on public stock exchanges, which limits their liquidity. Investors should be aware that, while SEC registration provides some protections and disclosures, it does not eliminate the risks, potential for high fees and illiquidity common to this kind of REIT.
Non-traded REIT vs traded REIT
Non-traded REITs and traded REITs both offer investors exposure to real estate, but they differ significantly in terms of liquidity, valuation, fees and accessibility.
Non-traded REITs are not listed on public exchanges, making them relatively illiquid. Investors often need to hold their shares for several years until a liquidity event occurs. These REITs are typically valued quarterly or annually, leading to less price transparency. They often come with higher upfront fees and management costs. However, non-traded REITs may offer stable income and reduced market volatility since its value is less affected by daily market fluctuations.
Traded REITs, on the other hand, are listed on major stock exchanges and can be bought and sold like stocks, providing increased action to your funds, while their prices fluctuate based on market conditions, offering more transparency. Traded REITs usually have lower fees compared to non-traded REITs. They are accessible to a broader range of investors and offer the potential for both income and capital appreciation, but they are subject to market volatility.
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How non-traded REITs compete
Because non-traded REITs are not listed on the stock market and outside the scope of most institutional and professional investors, they can operate very differently (often aggressively) than public REITs which are under the spotlight of investors around the country.
Non-traded REITs are known for:
- 1.
Using far more leverage to make investments: Whereas a publicly traded REIT might use 50% owner's equity and 50% debt to buy property, non-traded REITs are known to leverage with much higher ratios, meaning any drop in real estate prices or cash flows from rent is magnified for the investor.
- 2.
Returning capital in distributions: One of the hottest marketing gimmicks is high yields. Non-traded REITs could advertise high annual yields by returning an investor's principle back with each distribution. Investors and advisors alike are fooled into believing that distributions are gains, and over time all the equity of the REIT is drained, leaving the investor with nothing but the cash returned in the past and already spent.
- 3.
Borrowing for distributions: Non-traded REITs often used leverage in order to pay out larger distributions. This not only increases the risk in owning the REIT as equity is replaced with debt (think about this like constantly refinancing your mortgage for spending money) but it also reduces the amount of money the investor has working for them in the trust.
- 4.
Poor information and limited prospectuses: Information is everything when it comes to making a sound investment. Non-traded REITs often disclose little to no information to private investors compared to the public filings required of publicly-listed REITs. Also, unlike publicly-listed REITs, there exists only a very small pool of investors to do collective due diligence on their investment.
- 5.
Difficulty in selling: By their very nature, non-traded REITs can be difficult or costly to sell as they are sold over the counter between brokers, not on any major exchange. Selling a position could take weeks or months, require the payment of a large commission to a broker, or force the seller into significantly discounting their investment in order to make the sale.
- 6.
Higher returns than public REITs: Sophisticated investors with a background in finance or accounting can find higher returns in non-traded REITs as limited information and illiquidity gives opportunity for “diamond in the rough” finds. Of course, for investors with little to no investing experience, non-traded REITs were used to find investment dollars for projects and real estate portfolios that would never attract the attention of professional investors.
Pros and cons of non-traded REITs
Pros
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Stable income: Non-traded REITs often provide consistent dividend income, derived from rental payments or interest on real estate loans
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Less market volatility: Not being publicly traded means its value is less affected by daily stock market fluctuations
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Diversification: Offers exposure to real estate, adding diversity to an investment portfolio
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Long-term investment: Designed for investors looking for long-term, stable returns rather than short-term gains
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Professional management: Managed by experienced real estate professionals, reducing the burden of direct property management
Cons
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Illiquidity: Difficult to sell quickly; investors often need to hold their shares for several years
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Higher fees: Generally come with higher upfront and ongoing management fees compared to traded REITs
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Limited transparency: Infrequent valuation updates can make it hard to assess the current value of the investment
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Complex redemption programs: Redemption programs are often limited and may impose penalties for early withdrawal
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Regulatory risks: While registered with the SEC, they are not immune to regulatory changes that can impact their operations and profitability
Should you invest in a non-traded REIT?
Ninety-nine percent of investors would be wise to avoid non-traded REITs, entirely. Not only are there plenty of high-yielding public REITs on the market, they are also more liquid, more transparent and more diversified than a non-traded REIT.
If you are interested in investing in a non-traded REIT be sure to know:
- What's in the deal for your broker? Non-traded REITs can generate large commissions for brokers who sell units to clients
- The financial reports for the company as well as a background of company management. This should be in any prospectus
- Proof of ownership of each property and some familiarity with the property in question. Just as you wouldn't throw a dart at classified ads to buy a rental property, you shouldn't invest in a non-traded REIT without knowing what it owns, either
- An understanding of the risks in investing in an illiquid REIT that may or may not provide any returns for investors. Non-traded REITs are substantially more risky than public REITs, as a whole
If you're a banker or accountant by day, a non-traded REIT may be an interesting entrepreneurial investment. If you can't claim finance or accounting as your favorite past times, a non-traded REIT should be dumped for investments that are more easily understood and better investigated. Publicly traded REITs should be the first place to start for alternatives.
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Chris Clark is freelance contributor with MoneyWise, based in Kansas City, Mo. He has written for numerous publications and spent 18 years as a reporter and editor with The Associated Press.
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