Investors are always looking for consistent cash flow, capital appreciation and tax benefits. Unlisted REITs offer such opportunities.
A real estate investment trust, or REIT, is an entity that owns real estate that generates income. Unlisted REITs are real estate investments with shares of companies that are not publicly traded.
Non-traded REITs include offices, multi-family properties, shopping malls, hotels or warehouses, among others. Companies in the non-commercial real estate industry buy, develop and operate a property to keep the asset in their portfolio for the long term to allow for capital appreciation.
While unlisted REITs can be a great way to generate a higher return and diversify your investment portfolio with an uncorrelated asset, they come with special risks compared to their listed counterparts. Here’s what interested investors need to know about this asset class:
- What are non-traded REITs.
- Is an unlisted REIT a good investment?
- Listed REITs vs. Unlisted REITs.
What are non-traded REITs
There are two types of unlisted REITs: private REITs and unlisted public REITs.
Private REITs require that institutional or accredited investors have some equity to qualify for the investment opportunity. However, unlisted public REITs are open to unauthorized investors. Both REIT options have minimums that are generally around $ 1,000 or more.
Although non-traded REITs are registered with the United States Securities and Exchange Commission and are therefore regulated, they are not traded on a public exchange. Private REITs are exempt from most SEC regulatory requirements. This makes unlisted REITs in investment illiquid, as investors cannot easily enter and exit investment transactions like listed REITs.
Investors have the potential to generate substantial returns with non-traded REIT investments, potentially paid for through distributions or dividends from rent payments. In particular, when interest rates are low, income-seeking investors may turn to these higher-yielding investments.
“Non-traded REITs offer less volatility, higher income as a percentage of total return and low correlations to the public equity market,” said Raj Dhanda, CEO of Black Creek Group in Denver.
“By adding private real estate to a portfolio of stocks and bonds, it can increase returns, generate income and reduce risk over time,” adds Dhanda.
Since REITs are untaxed, non-traded REITs also offer tax benefits, lowering your tax bill and thus ensuring a better return on your investment, according to real estate investing experts. Whether you classify your REIT dividends as ordinary income, capital gains, or return of capital, each is taxed at its own rate.
To invest in unlisted REITs, investors often work with an individual broker or financial advisor. Unlisted REITs are high commission investment products, in which sales representatives, who receive a commission, present different transactions.
Is an unlisted REIT a good investment?
Due to their unique characteristics compared to listed REITs, unlisted REITs carry their risks.
Non-traded REITs come with high fees. Some of these fees include up-front charges such as a commission from the sales representative or company presenting the case, as well as transaction and organizational costs, and ownership and asset management fees.
According to the SEC, the fee can be up to 15% of the offering price. But with the proliferation of real estate crowdfunding platforms, investors can access non-traded REITs online at lower fees.
Non-traded REIT transactions are known for their lack of transparency. Inexperienced investors may be unable to make a good judgment on an unregistered REIT as they may not be able to understand all of the upfront and upfront costs, clouding the value of the investment. When considering an investment opportunity, investors should educate themselves about the amount of commissions that the sales representative or company will receive, the performance and the projected costs of the property, according to experts. This way you can determine if REIT is right for you.
But as Dhanda puts it, “Private real estate has really evolved over the past two decades and now offers investors more transparency, monthly liquidity and alignment with the investment manager. “
While recognizing the risks inherent in non-traded REITs, it is also important to recognize their merits.
“There is a great dearth of uncorrelated income in the market today and these investments are a perfect fit for that,” says Dhanda.
Non-traded REIT investments are suitable for investors who have a long-term investment strategy. Investors can be stuck in a non-traded REIT transaction for several years before making a profit. Deciding to withdraw from an investment prematurely could result in high fees or loss of total return. For this reason, investors should consider their tolerance for short-term risk when investing in non-traded REITs.
Choosing to liquidate stocks prior to a liquidity event can pose challenges for investors, as non-traded REITs may place restrictions on the number of shares that can be redeemed. If a buyback program allows you to liquidate early, your shares may be sold at a lower value than what was originally purchased.
Listed or unlisted REITs
Because listed REITs are publicly traded, they are subject to volatility and market sentiment. But stock market fluctuations aren’t a concern for unlisted REITs, and investors don’t have to worry about day-to-day price movements. Their valuation is determined by the value of the asset itself. This is why it is so important to understand the intrinsic value of a property and to ensure that it is properly valued.
Andrew Aran, managing partner at Regency Wealth Management in Ramsey, New Jersey, says investors don’t have to focus on the short-term valuation swings of public REITs.
“Unlisted REITs can take a longer time horizon in managing their investments,” he says.
What can be of concern for unlisted REITs is that “the cyclicality (economic sensitivity) of real estate and funding risks often results in periodic volatility in earnings and valuations,” observes Aran.
Investments in public REITs require the purchase of one stock, the typical starting investment amount for non-traded REITs ranges from $ 1,000 to $ 2,500, according to the SEC.
Furthermore, while public REIT investments use indices for performance benchmarks, unlisted REITs do not have an independent benchmark for benchmarking performance. This is where investors should trust the companies they do business with to provide reliable updates on property details.
Given the different risks and rewards associated with public and non-traded REITs, investors can benefit from both classes of assets in their portfolios. Dhanda says public and private REITs have a role in a portfolio; it’s not an either-or situation.
To take with
Given the many risks, non-traded REITs may be a better consideration for investors who are experienced in this area and who are willing and able to take unique risks.
“There is definitely a potential for conflicts of interest, liquidity issues and disproportionate transaction fees,” warns Anish Malhotra, CEO and co-founder of Plotify, a real estate asset manager and technology-driven platform.
“My advice to anyone investing in private REITs would be to carefully analyze the incentives of the different parties involved in the management, monitoring and sales / marketing process so that you are aware of potential issues and conflicts that may arise”, Malhotra said. .