Understanding Non-traded REIT

David Cohn
Feb 5, 2024

Key point: Non-traded REITs offer a unique blend of opportunities and risks. They enable accredited retail investors to diversify their portfolios by investing in the best income-producing commercial real estate assets, all while being regulated by both the SEC and the IRS.

However, potential investors should be aware of the higher risk profile of these investment vehicles, their additional upfront fees, and the general lack of liquidity compared to publicly traded options.

What is a non-traded REIT?

A non-traded REIT, or Real Estate Investment Trust, is a specialized investment vehicle that is regulated and registered with the Securities and Exchange Commission (SEC) but not listed on public stock exchanges.

Designed to provide accredited retail investors with opportunities to invest in otherwise hard-to-access real estate assets, non-traded REITs come with certain tax benefits as well.

For instance, they are required by the Internal Revenue Service (IRS) to distribute a minimum of 90% of their taxable income to their investors. This rule aligns with general IRS regulations for REITs, providing a form of income return to stakeholders.

These investments primarily focus on owning and managing a variety of income-generating real estate assets such as commercial buildings, warehouses, and residential apartments.

Because they aren't publicly traded, non-traded REITs are often seen as less liquid and transparent than their publicly traded counterparts. This illiquidity is one of the reasons why they are considered riskier but potentially more rewarding investment options.

When it comes to purchasing shares in a non-traded REIT, the investment process is more complex than buying shares of publicly traded companies. Investors are often subject to additional fees, including upfront sales commissions and dealer manager fees.

In addition to these costs, the primary challenge has been the illiquidity of these investments due to the absence of a public trading platform. However, limited secondary markets have emerged in recent years, offering some measure of liquidity that was previously unavailable.

To better grasp the concept of non-traded REITs, let's look at an illustrative example.

Imagine a fictional REIT called Trust ABC, which specializes in buying and managing hotels in popular tourist destinations across the US.

The main goal of this trust is to generate both steady income and the possibility of capital gains through savvy property management and hotel operations.

Key details of Trust ABC include

  • Investment focus - The Trust primarily invests in different types of hotels—full-service, boutique, and resorts. They select properties in tourist hotspots with high occupancy and strong demand, aiming for future growth potential.
  • Geographic target - The Trust buys hotels in prime tourist locations across the United States. These could range from beachfront properties to hotels in bustling cities, or even areas close to national parks.
  • Management approach - An expert management team is responsible for the day-to-day running of the hotels. This team is committed to delivering great guest experiences, maintaining quality, and driving revenue through effective marketing and operational tactics.

For this type of REIT investments, potential investors usually buy shares through private placements, often facilitated by financial advisors or broker-dealers.

What are the advantages of non-traded REITs?

  • Limited liquidity - As these REITs are not publicly traded, selling them quickly for immediate cash needs can be challenging.
  • Uncertain income - While dividends are often substantial, there's no assurance that they will be consistently paid.
  • Ambiguous valuation - Without a public trading platform, determining the exact market value of these securities can be complicated.
  • High-risk factor - The inability to easily track the underlying assets or ascertain their market value increases the investment risk.
  • High upfront costs - Substantial amounts are spent on marketing these REITs and compensating financial advisors and broker-dealers, leading to hefty initial fees for investors.

What are the differences between non-traded REITs, private REITs, and interval funds?

 All three—non-traded REITs, private REITs, and interval funds—are not publicly traded, which means they generally offer less liquidity and transparency. However, they differ in various other aspects, as outlined below:


General characteristics

  • Non-Traded REIT: These real estate investment trusts focus on owning and managing income-producing properties but are not listed on any major public exchange.
  • Private REIT: Unlike non-traded REITs, private REITs are not required to register with the SEC and are also not listed on any public exchange. They are usually sold via brokerage channels.
  • Interval Fund: These funds are also not publicly traded on secondary markets.

Buyback options

  • Non-Traded REIT: Not applicable
  • Private REIT: Not applicable
  • Interval Fund: The fund companies repurchase their outstanding shares at their net asset value (NAV).

Type of investors

  • Non-Traded REIT: Primarily geared towards accredited investors.
  • Private REIT: Aimed at both institutional and accredited investors.
  • Interval Fund: Typically for accredited investors.

Management structure

  • Non-Traded REIT: Usually managed and advised externally.
  • Private REIT: Also managed and advised externally.
  • Interval Fund: Can be either internally or externally managed or advised.

How do non-traded vs. publicly traded REITs compare to each other?

Non-traded REITs and publicly traded REITs share the requirement of registering with the Securities and Exchange Commission (SEC), but they differ in several key aspects.

One of the most noticeable differences is in their accessibility to the public. Non-traded REITs are not listed on any national stock exchange, making them generally inaccessible for casual traders.

These are typically reserved for accredited investors, defined as individuals with a net worth exceeding $1 million or who have had an annual income of at least $200,000 in the past two years.

Management of non-traded REITs is usually conducted by external advisors, which adds another layer to consider when evaluating these investments. Furthermore, these types of REITs often lack liquidity due to their absence from secondary trading markets, making it challenging for investors to quickly convert their holdings into cash.

In terms of risk, non-traded REITs usually involve a higher level of risk than their publicly traded counterparts. While they do offer dividends, these are often irregular and less predictable.

In contrast, publicly traded REITs are listed on national stock exchanges, making them accessible to a broader range of investors with no specific financial prerequisites.

These REITs are generally self-managed, simplifying the operational structure compared to non-traded REITs. Their presence on public exchanges means they offer high liquidity, allowing investors to easily buy and sell shares. They also tend to carry less risk compared to non-traded REITs.

Finally, publicly traded REITs are known for providing more consistent and reliable quarterly dividends, making them a more predictable income source for investors.

How is the value of non-traded REITs determined?

The valuation process for non-traded REITs typically involves periodic updates that offer an estimated per-share value. Unlike publicly traded REITs where market dynamics offer real-time valuation, non-traded REITs usually rely on appraisals of the properties they own.

These appraisals, along with other financial metrics, are often conducted either internally by the REIT’s management team or by independent valuation experts.

It's important for potential investors to understand that these valuations might not be as readily transparent or accessible as with publicly traded REITs. Therefore, due diligence and perhaps consultation with financial advisors are advisable.

What about dividend payments from non-traded REITs?

It's mandated by law that non-traded REITs distribute a minimum of 90% of their taxable income to shareholders. This taxable income includes both ordinary income streams like rents, as well as capital gains from property sales.

These distributions are usually made periodically and are one of the key attractions for investors seeking income-producing assets.

In addition to income distributions, some non-traded REITs also return capital to investors, further enhancing the yield on the investment. However, it's worth noting that these dividends can be less predictable than those from publicly traded REITs.

How safe are non-traded REITs as an investment?

Investing in non-traded REITs generally carries a higher level of risk compared to publicly traded ones. The main reasons include their illiquidity and the complexity involved in accurately valuing these types of investments.

Because they are not listed on public exchanges and cannot be easily traded in secondary markets, exiting the investment can be challenging. The difficulty in determining their true market value adds another layer of risk, as it requires investors to have more information to make educated decisions.

This often necessitates a more hands-on approach to due diligence, and potential investors may benefit from consulting financial advisors who specialize in this type of asset.

What are the typical fees associated with investing in non-traded REITs?

Investing in non-traded REITs often involves a range of fees that investors need to be aware of. These can include upfront sales commissions, dealer manager fees, and ongoing management fees.

The lack of a public trading venue means that these investment products can come with a higher cost structure compared to publicly traded REITs. These fees can significantly impact the overall returns on the investment. Therefore, it’s crucial for investors to fully understand the fee schedule before committing their funds.

How can I liquidate my investment in a non-traded REIT?

Liquidity is a significant concern when it comes to non-traded REITs. Unlike their publicly traded counterparts, these investments don't have a ready secondary market where shares can be easily sold.

However, some non-traded REITs offer repurchase programs, though these usually come with certain restrictions and limitations. More recently, limited secondary markets have begun to develop, offering some avenues for liquidation.

Regardless, investors should go into a non-traded REIT investment with a long-term perspective due to these liquidity challenges.