Non-traded REITS are real estate investment trusts that, unlike typical REITs, are not traded or listed publically. Non-traded REITs can be preferable to some investors because they are not subject to some of the volatility of traded REITs, but this may not be worth diminished liquidity.
Q. So everybody’s heard of Real Estate Investment Trusts, but now so-called “non-traded” REITS are in the news. Why?
A. Well, because one big BD just got hit with a big fine for their selling practices in pushing these out. Remember that the term REIT is a creature of tax law, not securities law. It’s a way of accumulating assets in a passive RE operation and not pay tax at the entitiy level. There’s no requirement that they be the listed, traded securities we all know about. So some people package up properties and sell them, but don’t list them on the market.
Q. But isn’t the fact that most REITS are liquid investments a key benefit that makes them attractive to investors?
A. Yes… marketers of non-traded REITS actually try to sell that as a benefit, saying they aren’t subject to the ups and downs of the markets. But that’s like saying a car without an engine is superior to other cars, because it’ll never be in a wreck.
Q. So, illiquidity aside, are there other reasons to be cautious with non-traded REITS?
A. Very definitely. These things just don’t have a very good track record for investors. And one reason is that they tend to be very high “YTB” products. They often carry huge upfront sales loads that mean there is a very high “yield” to the broker– but not to the investor!
Q. So why have they become so popular?
A. The search for yield. The Fed’s ZIRP policy has created huge problems for savers, and they’re looking for “alternatives” to fill the yield gap. And there are some great alternative products out there to do that, from MLPs to royalties to P2P lending… and many more. But you do have to know what you’re buying, and anything that is both illiquid and carries a high upfront sales load earns at least a yellow flag.