Non-Traded REIT

A real estate investment trust (REIT) that is not listed and traded on a public exchange

What is a Non-Traded REIT?

A non-traded REIT refers to a real estate investment trust (REIT) that is not listed and traded on a public exchange. Non-traded REITs allow investors to access diversified real estate investments with little capital requirements and added taxation benefits.

 

Non-Traded REIT

 

Real Estate Investment Trust (REIT) Explained

A real estate investment trust (REIT) refers to a trust company that owns, operates, and finances income-generating real estate investments. REITs are designed like mutual funds, which are essentially pooled funds from many investors used to generate economies of scale and gain access to investment options that they would not normally be able to access individually.

Real estate investments are characterized by being very illiquid, expensive, requiring high upkeep, and being inhomogeneous. Such factors make investing in real estate very difficult for everyday retail investors. However, REITs provide the opportunity for many retail investors to pool their funds together. With the assistance of a professional real estate portfolio manager, retail investors can invest in real estate without dealing with the difficulties of buying, managing, and financing the individual properties themselves.

REITs follow a simple business model in which the REITs are companies that are set up to:

  1. Buy properties
  2. Collect rents from tenants
  3. Redistribute rents to shareholders as dividends

 

REITs generally specialize in specific real estate sectors; however, some may diversify into many different types of properties. Some examples of real estate sectors are:

  • Residential (houses, apartments, condos)
  • Commercial (office buildings, retail centers, storage centers, hotels)
  • Industrial (warehouses, factories)
  • Infrastructure (pipelines, cables, telephone towers)
  • Other (healthcare facilities, timberland, etc.)

 

REITs also provide a tax benefit for investors since they are organized as trusts; they receive favorable tax treatment and must pay out virtually all of its income as dividends to investors. It makes REITs very attractive for older income investors.

 

Forms of REITs

REITs come in different forms for investors to choose from. There are three primary types of REITs:

  1. Private REITs
  2. Public Non-Traded REITs
  3. Public Traded REITs

 

Private REITs are not registered with the Securities Exchange Commission (SEC) and are not regulated by the SEC. There is very little public information on these REITs, and generally, only high net-worth individuals can invest in such types of REITs. Private REITs are extremely illiquid, and it is difficult to redeem funds from them.

Public non-traded REITs are not listed on a public exchange; however, they are regulated by the SEC. They are illiquid investments but can be invested by retail investors. However, like private REITs, it may be difficult to redeem funds from public non-traded trusts trusts.

Public traded REITs are SEC-registered and regulated. They are subject to the volatility of the markets; however, they also offer the benefit of being much more liquid. Investors can redeem their funds much more easily than with private REITs or public non-traded REITs. Public traded REITs are also the most transparent form of REITs.

 

Non-Traded REITs Explained

Generally, REITs are publicly traded on a financial exchange just like stocks; however, some REITs are not publicly listed. Because the REITs are not traded on a secondary market, they are much more illiquid than their publicly listed counterparts. It makes the fees and expected returns higher from investors as well. For the REIT managers, non-traded REITs are favorable since the capital is locked up for a longer period of time.

 

Characteristics of Non-Traded REITs

Non-traded REITs operate much like traded REITs with the same business model, favorable tax treatments, and an obligation to return a high proportion of income back to REIT holders in the form of dividends.

Non-traded REITs, although not publicly listed, must still be registered with the SEC. They also must still make regulatory filings as well, including quarterly and annual financial reports.

Most non-traded REITs are created with a finite maturity date built-in, where there are two possible alternatives once reaching maturity.

  1. The non-traded REIT must list on a public exchange.
  2. The non-traded REIT must liquidate.

 

Benefits of Non-Traded REITs

The benefits of non-traded REITs are as follows:

  • Available to most investors without large capital requirements
  • Regulated by the SEC and are transparent in providing financial information
  • Absence of daily price fluctuations and volatility

 

Drawbacks of Non-Traded REITs

Some drawbacks of investing in non-traded REITs are as follows:

  • Generally, charge higher fees
  • Are illiquid – difficult to redeem funds

 

Additional Resources

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Absorption Rate
  • Real Estate Operating Company (REOC)
  • Risk Factors of Investing in REITs
  • REIT vs. REOC

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!