Non-traded REITs (“real estate investment trusts”) are investment companies marketed and sold to retail investors that invest in real estate – often in office buildings – and then are allowed to not pay taxes so long as they pay out at least 90 percent of their income to shareholders.
Shares of non-traded REITs do not trade on any public exchange, and there is no way for investors to readily sell their shares. Once you’re in, they are illiquid – you cannot get out, often for periods of eight or more years. Moreover, because they are not publicly traded, investors lack material financial information about the REITs that they would otherwise be able to access for public securities.
Learn from top U.S. investment fraud lawyers why no retail investors should EVER invest in non-traded REITs.
It is unclear why anyone would want to own a non-traded REIT when there are hundreds of publicly traded REITs available to investors who want to diversify into real estate investments. Publicly traded REITs generally have long track records, public financial disclosures, and are easy to buy and sell. FINRA has issued an investor alert regarding traded and non-traded REITs that provides an in-depth look at the differences between the two.
The gloomy truth about non-traded REITs is well-documented. The high up-front and annual fees essentially guarantee that the investor will lose money. They cannot be sold on any public exchange, and the company itself offers limited to no redemptions of shares. Even if they do offer redemptions, redemptions are for less than the share’s purchase price.
They are often marketed to unsophisticated retirees who are scared of the stock market. While it is true that the share prices for non-traded REITs are less volatile than the stock market, it is because the company itself decides what the share price will be.
Non-traded REITS have made people richer – just not the investors. The fees associated with non-traded REITs are astronomical. Front load fees can be as much as 15% of the per share price, with a large chunk of that going as a commission to the selling broker-dealer. If you’ve opted into the dividend reinvestment plan, in which investors reinvest their dividends for more shares rather than receiving the dividends in case, they are again charged fees on those reinvestments, just like they would be at the initial purchase. And, there are significant conflicts of interest since the non-traded REITs’ property transactions and service agreements are typically conducted with other entities in which sponsors have economic interests.
A 2015 study evaluated the ex-post investment performance of non-traded REITs and documented that investors would have realized significantly higher returns had they invested in traded REITs rather than non-traded REITs. The results were clear -, non-traded REIT investors would have had 45% more wealth had they invested in a diversified portfolio of traded REITs instead of the 41 non-traded REITs which have had liquidity events.
Non-traded REITs are sold – not bought. Financial professionals are often eager to sell non-traded REITs to clients looking for income because they offer steep selling commissions. Investors should be wary of advisers that recommend any non-traded REITs. Run – don’t walk – away.