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Non-Traded REITs: What are They?

Last updated 03/15/2024 by

Daniel Dikio

Edited by

Fact checked by

Summary:
Real Estate Investment Trusts (REITs) have long been a popular choice for investors seeking exposure to real estate markets without the complexities of property ownership. While publicly traded REITs are well-known, there’s another category of REITs that may not be as familiar: Non-Traded REITs.

What are non-traded REITs?

A Non-Traded REIT is a real estate investment vehicle that raises capital from investors to purchase, manage, and operate income-producing properties. The primary goal is to generate rental income and capital appreciation for shareholders.
Non-Traded REITs typically operate under a structure where investors purchase shares in the trust. The REIT then uses this capital to acquire and manage a diversified portfolio of real estate assets, such as office buildings, shopping centers, and apartment complexes.
The regulatory framework for Non-Traded REITs is different from that of publicly traded REITs. The Securities and Exchange Commission (SEC) oversees publicly traded REITs, while Non-Traded REITs are subject to less stringent reporting requirements. This can impact the level of transparency and investor protections in place.

Pros

Steady income stream

Non-Traded REITs often provide a stable and predictable income stream through regular distributions, making them appealing to income-focused investors.

Portfolio diversification

Investors can achieve diversification across various property types and geographic locations by investing in Non-Traded REITs, reducing the risk associated with a single property or market.

Potential for capital appreciation

Investors may benefit from potential property value appreciation, which can lead to higher share prices over time.

Cons

Illiquidity

Non-Traded REITs lack liquidity, making it challenging to sell shares or access invested capital. Exit strategies are limited and can involve significant delays.

High fees and costs

Non-Traded REITs often come with high upfront fees and ongoing expenses, which can erode returns over time.

Limited transparency

Compared to publicly traded REITs, Non-Traded REITs offer limited transparency into their underlying assets and financial performance.

How to invest in non-traded REITs

Investing in Non-Traded REITs requires careful consideration and due diligence. Here’s how to get started:

Brokerage firms and financial advisors

Many brokerage firms and financial advisors offer access to Non-Traded REITs. These professionals can provide guidance on suitable options based on your financial goals and risk tolerance.

Minimum investment requirements

Non-Traded REITs often have minimum investment requirements, which can vary significantly from one offering to another. Ensure that you meet the minimum investment criteria before considering an investment.

Due diligence before investing

Before investing, conduct thorough due diligence. Review the REIT’s prospectus, financial statements, and offering documents. Assess the track record of the REIT sponsor and the quality of the underlying real estate assets.

Tax implications

Tax treatment of non-traded REIT distributions

Non-Traded REIT distributions are typically taxed as ordinary income, which may result in a higher tax liability compared to other investment options. Investors should consult with a tax advisor to understand the tax implications fully.

Potential tax advantages

Despite the tax treatment of distributions, Non-Traded REITs may offer potential tax advantages, such as depreciation deductions and the ability to defer capital gains through 1031 exchanges.

Risks and considerations

Investing in Non-Traded REITs involves specific risks and considerations that investors should be aware of:

Market risks

Non-Traded REITs are not immune to real estate market fluctuations. Economic downturns or changes in property market conditions can impact the performance of these investments.

Interest rate risks

Non-Traded REITs may be sensitive to interest rate movements, which can affect their borrowing costs and profitability.

Duration of investment

Investors should be prepared for a longer investment horizon when considering Non-Traded REITs due to their illiquid nature.

Exit strategies

Exiting a Non-Traded REIT investment can be challenging and may involve selling shares on a secondary market at a discount or waiting until the REIT undergoes a liquidity event.

Frequently asked questions (FAQ)

What are non-traded REITs?

Non-Traded REITs are real estate investment vehicles that pool investors’ capital to acquire and manage a diversified portfolio of income-producing properties.

How do non-traded REITs differ from publicly traded REITs?

Non-Traded REITs are not listed on stock exchanges and lack liquidity, while publicly traded REITs are listed and trade like stocks.

Are there any tax advantages to investing in non-traded REITs?

Non-Traded REITs may offer potential tax advantages, such as depreciation deductions and the ability to defer capital gains through 1031 exchanges.

What are the potential risks of investing in non-traded REITs?

Potential risks include illiquidity, high fees, limited transparency, market risks, interest rate risks, and a longer investment horizon.

How can I sell my shares in a non-traded REIT?

Selling shares in a Non-Traded REIT can be challenging due to their illiquid nature. Options include selling on a secondary market or waiting for a liquidity event.

Should I consider non-traded REITs as part of my investment portfolio?

Whether to include Non-Traded REITs in your portfolio depends on your investment goals, risk tolerance, and understanding of the unique characteristics and risks associated with these investments.

Key takeaways

  • Non-Traded REITs offer unique advantages but also come with risks, including illiquidity and limited transparency.
  • Investors should carefully consider their financial goals and risk tolerance before investing in Non-Traded REITs.
  • Due diligence and professional advice are essential steps in making informed investment decisions.

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