Why I Don’t Like Private REITs for the Average Investor

Private REITs lack liquidity and transparency

Clock in front of sky scraper.
With a private REIT, you may not know the value of what you own. Russ Rohde, Getty Images

Some REITs are publicly traded which means the shares trade on a stock exchange. You can buy and sell these shares at any time the same way you buy and sell shares of a stock or mutual fund. Public REITs must comply with numerous types of required financial reporting.

Other REITS are private (also referred to as non-exchange traded REITs) which means you buy the shares directly from the offering entity by filling out paperwork.

These REITs are typically sold at $10 a share. You have limited options for selling shares of a private REIT as there is no readily available public market for them, so it is an investment you may end up owning for a long time. After the initial filing paperwork private REITS have little ongoing financial reporting requirements. This lack of transparency makes it difficult to know the actual value of your investment.

For experienced investors who understand the economics of the type of property owned, private REITs can be an appropriate investment. However, for the average investor, there are three reasons I am not a fan of private REITs.  

1. Commissions

Private REITs are typically sold by brokers or financial advisors who receive a commission for selling them. Commissions can range from 5-10% of your investment amount, so if you invest $100,000 in a private REIT, your broker could earn anywhere from $5,000 - $10,000.

These upfront commissions provide a powerful incentive for someone to talk about the benefits of the investment without cautioning you about the risks. You may not be presented with an objective analysis.

2. Overstated Benefits

Private REITs are often sold as a retirement investment due to the dividend distributions, which can range from about 5 – 8%.

Brokers suggest that the payout amounts are consistent, however these dividends are not guaranteed and in 2008 – 2012 many private REITs reduced or eliminated their dividends.  If you were relying on these dividends for your retirement income, you were out of luck.

3. Problems When You Reach 70

With a private REIT, it is not easy to sell shares. It took me seven years to move one client out of a private REIT position. Each year we wrote to the company and requested that they redeem shares. Each year the company allowed the investor to sell only a small portion of their shares.

This lack of liquidity can cause problems if you own a private REIT in an IRA. Required minimum distributions begin at age 70 and as you age each year you are older you must take a larger withdrawal amount. At some point you will be required to take out more than the dividend amount being paid. If you can’t sell shares, this is a problem.

If you’re an experienced investor capable of understanding the management strategy of the private REIT, and it will be only one part of a diversified portfolio, then go for it.

For the average Joe, stick with other real estate options that offer more transparency and liquidity. 

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