By James Saft
Jan 22 When a financial advisor tried to sell my
sister a fee heavy non-traded REIT last year, pitching it as an
alternative to fixed income, I told her she ought to fire him.
Then, having thought it over, I told her she ought to fire
him, re-hire him and fire him again.
Non-traded REITs are a species of real estate investment
trusts, specifically ones which are not traded on an exchange
and which typically lock investors in for seven or more years.
Like traditional REITs, non-traded ones invest in real
estate, often in a market niche like college housing or medical
office buildings, and then are allowed to not pay taxes so long
as they pay out at least 90 percent of income to shareholders.
Shareholders pay taxes on the income at their normal rates.
Sounds obscure, but actually more than $20 billion of
non-traded REITs were sold in the U.S. last year, according to
data from market tracking firm Robert A. Stanger, as investors
desperate for yield met brokers happy to trouser fat fees.
Like so many dubious investments, non-traded REITs are sold
not bought, in this case by aggressive brokers and financial
advisors, often marketing to an unsophisticated retail audience
who are a bit scared of equities and are unhappy with miserable
fixed income returns due to low interest rates.
And while non-traded REIT returns have beat some other major
asset classes in recent years on some measures, they have done
so in a way and with a set of risks which rings warning bells.
They are illiquid. They lack oversight and safeguards that
publicly traded REITs must follow. And they very typically
feature a fee structure which is jaw dropping.
The Financial Industry Regulatory Authority, an industry
funded oversight body, went so far as to issue an "investor
alert" about non-traded REITs in May of last year, warning about
inaccurate and mis-leading marketing of the vehicles as well as
Just to give a flavor of the company in which non-traded
REITs are traveling, the most recent FINRA investor alert was
about marijuana stock scams.
HOST OF RISKS
The first issue with non-traded REITs is the fact that they
are illiquid. Unlike a regular REIT, you make a commitment for
five, seven or even ten years and during that period you not
only cannot choose to get your capital back, you enjoy less
oversight and protection.
Unlike publicly traded vehicles, non-traded REITs are not
forced to mark their investments to market in the same way,
leaving you somewhat at the manager's mercy when it comes to
"While it's true that the share prices for non-tradable
REITs are less volatile, it's only because the company
essentially decides on what the share price will be.
My advice is this: If you can't handle the volatility of a
publicly traded REIT, just stop looking at the share price! "Or
stick to safe investments like CDs," Ben Strubel, of wealth
management firm Strubel Investment Management, wrote in a note
And then there are the fees. While some fees are capped by
law, and there is great variation, they tend to be high. You
might easily pay 12.5 percent off the top when you buy a
non-traded REIT as an organizing and offering fee, with a
further selling commission and sometimes high ongoing management
And fees don't stop there. When non-traded REITs buy or
build property they often pay 4-6 percent fees as part of those
transactions. Then there are, sometimes, oversight fees,
financing coordination fees and real estate commissions.
And while many non-traded REITs produce high streams of
payouts to investors in early years, this is often done through
leverage, borrowing money to fund dividends, or by simply giving
investors some of their initial investment back.
As for performance, the data is skimpy but seems to indicate
moderate returns, but less than you can get from a traded REIT.
A 2012 study by Blue Vault Partners and the University of
Texas found that start-to-finish returns of a group of 17
non-traded REITS produced an internal rate of return of just
above 10 percent, but a percentage point or so below publicly
traded REITS, which enjoy superior liquidity and safeguards.
Seems to me if you are going to lock up your money for
longer, you ought to get a better return.
Non-traded REITs are doubtless making a lot of people rich,
but you are not likely to be one of them, and very likely can do
better on a risk-adjusted basis elsewhere.
So, if your advisor tries to put you in a non-traded REIT
fire him twice, or, if you want to hedge your bets just fire him
At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at email@example.com and find more columns at)