Independent Review of Public Non-Traded REITs

New York City

What is covered in this review of Public Non-Trade REITs?

In this review I will be covering the following information on Non-Traded REITs:

-What is a Non-Traded REIT

-Fees and other costs to invest

-Know what you are buying

-Realistic long term investment expectations

-How it is best used

-How it poorly used

Let’s get started…

What is a REIT?

A REIT is short for Real Estate Investment Trust.

Wikipedia defines a REIT as a company that owns, and in most cases, operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands. Some REITs also engage in financing real estate.

Non-Traded REIT vs Traded REIT

There are two primary types of REITs, Traded REITs and Non-Traded REITs.

Let me explain the difference, because I will only be discussing and reviewing Non-Traded REITs.

If you purchase a Traded REIT (also called Listed REIT) it will typically be listed on a public stock exchange which will allow you to buy and sell fairly quickly at a public and transparent price.

But, if you purchase a Non-Traded REIT, the sponsoring company will usually start the initial price per share at $10-$25 per share which is not listed on any stock exchange. Many Non-Traded REITs have been accused of inflating share prices because there is no way of knowing if their price is accurate after the initial offering. And if you need to liquidate you must wait until their required hold time has expired, which could be anywhere from 4-10 years, depending upon the sponsoring company.

In either case, one of the benefits and requirements of REITs is that they must pay out 90% of its income to shareholders in the form of dividends. And these high dividends are the biggest draw for many income oriented investors.

But, they do have their drawbacks…

Fees and other Costs

This is one of my pet peeves about this product!

If you ask anyone who owns a Non-Traded REIT, how much of their investment went to buying real estate and how much went towards fees and other cost? I’ll bet they can’t tell you. Why?

Because, the Non-Traded REITs and brokers that sell them, hide them behind confusing double speak and thick prospectus.

I did some research and found these are the typical fees for a new Non-Traded REIT that is being offered as of this writing:

Sales Commission – 7.0%
The Dealer Manager Fee – 2.5%
Offering Reimbursement – 2.0%
Acquisition Fee – 2.0%
Asset Management Fee – 0.80%
Property Management Fee – From 2.0% to 5.0%
Property Leasing Fee – From 2.0% to 8.0% of first year annual gross revenues
Liquidity Fee – 15% (After certain requirements are met)

If you think these costs are high, you’re not alone. But, even with these high costs, some Non-Traded REITs do make money. But, you must understand your hold time and the high risk involved.

So, here’s a quick recap…

Let’s say you want to invest in a Non-Traded REIT and are looking to invest $100,000 and before they even purchase a building you lose $7,000 for commissions to the broker, $2,500 for the brokerage firm and $2,000 to the sponsor of the REIT.

All total $11,500, that means only $88,500 of your money made it into the fund…

Whew and we’re not done yet!

The REIT now has yours and other investors’ money and can begin purchasing property which also comes at an additional cost and are very difficult to determine beforehand because these fees are dependent upon the total revenue and debt of each REIT and it is almost impossible to calculate up front.

See what I mean about confusing? Even the Finra, posted a warning about them!

Based upon the example I showed above, the remaining fees will range from a low of 21.8% to a high of 30.8%!

Know what you are buying

As I mentioned earlier, if you purchased a listed or traded REIT it was probably on a public stock exchange and you can buy them daily just like a regular stock.

For example,  Boston Properties (symbol: BXP) trades on the New York Stock Exchange. You can buy and sell their shares throughout any trading day and if you go to their website, you can see all the properties they own (this is no recommendation to buy BXP, only a random example) and at any time you would know what you are buying because all properties are disclosed for you to review before putting down your hard earned money.

A Non-Traded REIT is very different, you are typically investing before they have bought any property. But don’t get me wrong, most Non-Traded REITs will tell you what they hope to buy, you just won’t know what you own at time of investment.

This is the part of Non-Traded REITs that makes this investment scary and risky, because you just don’t know what the firm will buy until they actually make the purchase. With that being said, you must do some due diligence to make sure you are comfortable with your investment and the company sponsoring the REIT.

Realistic Long Term Expectations

Non-Traded REITs have done well over the years, but you could have done just as well in Traded REITs.

Reuters did an article on Non-Traded REITs and the author James Saft said…

“A 2012 study by Blue Vault Partners and the University of Texas found that start-to-finish returns of a group of 17 non-traded REITS produced an internal rate of return of just above 10 percent, but a percentage point or so below publicly traded REITS, which enjoy superior liquidity and safeguards. (Here is the link the study)”

So, it looks like the return is decent, but if I can quote Mr Saft again…

“Seems to me if you are going to lock up your money for longer, you ought to get a better return.”

And I kinda agree with him on that one, Traded REITs seem to win over the long term and are much more liquid and transparent!

How are Non-Traded REITs best used

This section is hard for me to complete, because I have a difficult time justifying purchasing a Non-Traded REIT over a passive, low cost ETF or mutual fund that invests in publicly traded REITs.

The best thing I can say is that many studies have shown that by adding real estate to your portfolio you can reduce risk and improve performance.

But an important note is that these studies don’t recommend which type of real estate to use, that is up to the investor to decide.

How are Non-Traded REITs poorly used

As mentioned in the Blue Vault Partners study above, Non-Traded REITs have provided decent returns and income opportunities, but they have underperformed other similar types of real estate investments and come with very high costs.

I have heard hundreds of horror stories on the misuses of Non-Traded REITs. The most common is that the investors were never told the high cost nor how their investment were ill-liquid.

One recent example is an older couple were looking for an investment with higher income than their bank CD. Wouldn’t you know it, their bank had an investment division and the bank, broker called them to discuss a “great” investment he had for them. They met and invested the majority of their nest egg in an investment that would earn 6.5% and it turned out to be a Non-Traded REIT.

After owning the investment for only two years, tragedy struck and the wife died. So, the elderly gentlemen went to the bank to get some money out and settle his wife’s estate and he finds out he can’t get anything but the dividend.

Then he discovered why the investment is called Non-Traded! His investment would not be liquidated until the 10th year and there was nothing he could do to get any funds out.

Sorry to say, this is not an isolated event.

Just google Non-Traded REITs and on the first page you will see, “Investor Alerts” from the government’s investment watchdog FINRA and several attorneys that specialize in Non-Traded REIT lawsuits.

Not exactly what I would expect to find about an investment I would be interested in investing in…

In Summary

Real Estate can be an important part of many portfolios. There are many choices to invest in real estate, such as private holdings, public Non-Traded REITs, public Traded REITs, mutual fund REITs and ETF REITs.

My advice on the best alternative that has been proven through study after study, is low cost, low fee ETF’s (exchange traded funds). These funds will give you the diversity and liquidity that most investors seek along with respectable dividends.

I am convinced that most brokers don’t understand what they are selling, nor do they understand their clients liquidity needs by suggesting Non-Traded REITs.

Have a question on Non-Traded REITs?

If you have questions, please let me know. You can contact me by simply clicking the contact button and send me a note.

I know that many Non-Traded REITs are confusing and many brokers are pushing their clients to buy them. But, as with any investment, you need to know the facts and make sure that this investment is right for you, because many Non-Traded REITs carry long term commitments with long hold times.

If you know anyone who has a Non-Traded REIT or has been offered to buy one, please share this blog post with them.

Judging from the calls I get, many people are getting conflicting information and my objective in writing this review was to educate and put out an independent, objective viewpoint.

If you like what you see here, feel free to pass this on through the sharing icons below.  That way more people will be able to find it and hopefully more people will benefit.

Last but not least, I am human and I do make mistakes.  If you see one on this review, please let me know I will quickly make the correction. And, if you have invested in a Non-Traded REIT and have questions, don’t hesitate to contact me as well.

Take Care,

Jerry Broussard

(Disclosure-This is an independent product review and is not a recommendation to buy or sell any investment. Before purchasing any investment product be sure to do your own due diligence and consult a properly licensed professional.)

Leave a Reply