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What Is a Non-Traded REIT?
Let me explain what a non-traded REIT is directly to you. It's a type of real estate investment trust that isn't listed on public exchanges, which means you as a retail investor can get into real estate deals that might otherwise be out of reach, along with some tax perks. But keep in mind, this comes with higher fees and much lower liquidity compared to traded options.
Key Takeaways
- Non-traded REITs aren't listed on public exchanges but give retail investors access to hard-to-reach real estate with tax benefits.
- Even though they're not listed, they must register with the SEC and file regular reports.
- Like traded REITs, they follow IRS rules requiring at least 90% of taxable income to go back to shareholders.
Understanding Non-Traded REITs
I want you to understand that a non-traded REIT is essentially a way to invest in real estate that minimizes or eliminates taxes while generating returns. Since it doesn't trade on any securities exchange, it's highly illiquid, often for years. You should know that front-end fees can hit up to 15%, way higher than what you'd see with traded REITs, mainly because there's no strong secondary market.
As an investor, you're expecting income from the REIT's real estate holdings, with rent being the primary source. But early on, the properties in a non-traded REIT might not be specified to you; they could be acquired through a blind pool, meaning you don't know exactly what's being added to the portfolio.
If you try to redeem early, expect steep fees that cut into your total return. Just like their traded counterparts, non-traded REITs must meet IRS standards, including distributing at least 90% of taxable income to shareholders. That's why many investors, including you potentially, look to these for steady income distributions.
Even without being on national exchanges, non-traded REITs have to register with the SEC and submit periodic filings like quarterly and annual reports, plus a prospectus. They can stay illiquid for a long time after starting, especially if income isn't steady right away.
Distributions to you as a shareholder might rely heavily on borrowed money, and they're not guaranteed—they could even exceed the REIT's actual cash flow. The board decides if and how much to distribute. In the beginning, those payouts might come straight from your initial capital investment.
Many non-traded REITs are set up with a fixed timeline, after which they either list on a national exchange or liquidate. Be aware that by liquidation time, your investment's value could have dropped significantly or even become worthless.
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