Real Estate Investment Trusts
“REITs” are popular investment vehicles for those seeking to invest in real estate. REITs are companies, trusts or associations that acquire income producing real estate, such as hotels, office buildings or apartment building complexes. REITs are comparable to mutual funds in enabling both small and large investors to participate in the real estate market. They trade on major exchanges and are very liquid. They may provide tax benefits and typically provide favorable dividend yields.
However, non-traded REITs are a different animal. As the name implies, non-traded REITs do not trade on national securities exchanges. Their upfront fees are very high. Since they are not listed on any exchange, they are very illiquid and intended to be held for eight years or longer. Early redemption of non-traded REITs is often very limited. Such redemptions, if they occur, are substantially below the purchase price. Returns paid on these products can be subsidized by borrowed money and can also include return of principal.
Because of the illiquid market, firms often priced them on monthly account statements at their purchase price, no matter what their actual value may have been. Last year, FINRA changed its rules to specifically require firms to go through a process to more accurately report the current value of non-traded REITs on account statements. They must also provide more transparency on the high front-end fees charged for these products.
In short, an investor should think long and hard before they invest in a non-traded REIT. They are not for everyone.