If you’re looking to build a thriving real estate portfolio without the hassle of direct property ownership, there are several strategic options to consider. For instance, you could explore real estate crowdfunding platforms or invest in a real estate investment trust (REIT). A REIT is a company that owns and manages income-generating commercial properties like hotels, retail shopping centers and multifamily apartment complexes, providing investors with an opportunity to share in the profits. Non-traded REITs, in particular, offer the potential for substantial returns, but they come with unique risks and considerations that require careful evaluation.
Partnering with a financial advisor can help you navigate these complexities and tailor a real estate investment strategy that aligns with your financial goals.
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Non-Traded vs. Publicly Traded REITs
REITs can either be non-traded or publicly traded, and most fall into the latter category.
A REIT that’s publicly traded has to be registered with the Securities and Exchange Commission and is typically listed on a stock exchange like the Nasdaq or the New York Stock Exchange (NYSE). These investments can be bought and sold throughout the day like any other stock or exchange-traded fund. When you buy or sell shares of a publicly traded REIT, you’ll pay a broker commission fee to execute the transaction.
Non-traded REITs, as their name suggests, are not traded on any stock exchange. They are still subject to the same rules as a publicly traded REIT in terms of SEC registration and the requirement that they return at least 90% of taxable income to their investors. That, however, is where the similarities end.
Liquidity and Cost
Liquidity broadly refers to how easy it is to recover the money you’ve invested in a particular security. Stocks, for example, are generally highly liquid because you can sell them at a moment’s notice as long as the market is open.
Compared to publicly traded REITs, non-traded REITs are extremely illiquid. Depending on the how the REIT is structured, the holding period may last anywhere from five to 10 years. If you have a short window for investing, you might need to avoid investing in a non-traded REIT.
Another issue with non-traded REITs centers on cost. While you may not be paying commission fees the way you would with a publicly traded REIT, you should be prepared to fork over a decent amount to maintain an investment in a non-traded REIT.
It’s not uncommon for investors to be charged an upfront fee that’s as high as 15% of the purchase price. That fee covers the various operational costs associated with the REIT. However, it also diminishes the amount of cash you’re actually investing, which in turn, can keep your investment from growing as much as you would like it to.
Are Non-Traded REITs a Good Investment?
In terms of returns, non-traded REITs are often cited as being the better bet compared to their publicly traded counterparts. Non-traded REITs tend to offer higher dividends. When you look at it in that context, it seems like non-traded REITs are the better option. But you can’t afford to discount the fees…
If you decide to invest $100,000 in one of these REITs, and there’s a 15% commission fee upfront, only $85,000 of that money gets invested. Because of the fees, you won’t be able to earn as much on your investment.
Do Your Research
If you’re going to take a gamble on non-traded REITs, it’s best to do your homework first. It’s a good idea to ask about the fees and the holding period. You’ll also need to read over the REIT’s prospectus to learn as much as possible about the underlying properties.
Don’t forget to consider how a future distribution from a non-traded REIT may affect your tax bill. Above all, you’ll need to keep in mind that returns aren’t guaranteed when you’re deciding how much risk you’re comfortable taking on.
Bottom Line
Investing in real estate without owning physical property can be a powerful way to diversify your portfolio and generate passive income. Whether you opt for real estate crowdfunding, publicly traded REITs or non-traded REITs, understanding the benefits and risks of each option is critical. Non-traded REITs, while offering the potential for higher returns, come with unique challenges such as illiquidity and high fees, making due diligence and strategic planning essential.
Real Estate Investing Tips
- Partnering with a financial advisor can help you navigate these complexities and tailor a real estate investment strategy that aligns with your financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Another way to invest in real estate is simply to buy a property to live in with the hope it appreciates in value. Use our calculator to see how much house you can afford.
- Make sure to diversify your investments. To see what mix of investments you should have based on your age and individual situation, use SmartAsset’s free asset allocation calculator.
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