Be Wary of Non-Traded REITs (2024)

FAQs

What are the risks of a non-traded REIT? ›

Income Risk: While non-traded REITs must distribute 90% of their annual taxable income, dividends are not guaranteed. In addition, non-traded REITs may use offering proceeds and borrowings to pay distributions, which reduces the value of investors' shares and capital available to invest in real estate assets.

Because the REITs are not traded on a secondary market, they are much more illiquid than their publicly listed counterparts. It makes the fees and expected returns higher from investors as well. For the REIT managers, non-traded REITs are favorable since the capital is locked up for a longer period of time.

Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.

Since most non-traded REITs are illiquid, there are often restrictions to redeeming and selling shares. While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value.

A non-traded REIT is not listed on a stock exchange, but it seeks to provide regular liquidity through redemption programs subject to terms described in the investment's prospectus. Assets are valued by independent third parties and published regularly so investors can evaluate the performance of their investment.

Interest Rate Risk

The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.

Shares in non-traded REITs are purchased directly, generally through a financial advisor or broker-dealer.

With a non-traded REIT, investors generally have to wait until the REIT liquidates its holdings, although they may be able to sell their shares through a broker. Investors can also use share redemption programs to access their funds.

Private REITs are not traded on an exchange, which means that there are more restriction in who can invest in them. As such, they tend to be less liquid than public REITs since it can be difficult for investors to find buyers for their shares should they decide to sell.

Summary of Why Investors May Not Want to Invest in REITs

But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.

Are REITs safer than stocks? ›

REITs have outperformed stocks on 20-to-50-year horizons. Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large. Several individual REITs delivered significantly higher returns than the S&P 500.

Stocks and REITs are not guaranteed and have been more volatile than bonds. Stocks provide ownership in corporations that intend to provide growth and/or current income. REITs typically provide high dividends plus the potential for moderate, long-term capital appreciation.

By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero. That's not to say that REIT values can't go down, though.

Their dividend rate is higher than most equities or other fixed-income investments. REITs have a low correlation with other assets, which makes them an excellent choice for portfolio diversification. REITs are highly liquid; if you need to pull your money out, you simply sell your shares on a stock exchange.

As the largest non-traded REIT, BREIT is something of a harbinger for the rest of the market. Blackstone fulfilled nearly 90 percent of its repurchase requests for BREIT in January this year, marking the highest payout percentage since proration began in 2022.

How Are REIT Dividends Treated for Tax Purposes? Allocations of dividends from Non-Traded REITs are ordinary income, capital gains, or return of capital. Part of the dividend that exceeds the REIT's taxable income and is not taxed is the return of capital distribution.

While non-traded REITs are required to register with and be regulated by the Securities and Exchange Commission (SEC), private REITs are not. Both REITs are not directly affected by stock market volatility because they don't trade on any national stock exchanges.

Whereas a publicly traded REIT offers a dependable quarterly dividend, distributions from non-traded REITs are dependent upon the board's decisions and income from investment properties.