Non-Traded Real Estate Investment Trusts (REITs) are a class of REITs not listed on public exchanges. Unlike their publicly traded counterparts, these REITs provide retail investors access to real estate investments that are typically difficult to reach. They also come with notable tax benefits. This article will delve into the structures, operations, advantages, and drawbacks of Non-Traded REITs.
What is a Non-Traded REIT?
A Non-Traded REIT, or non-exchange-traded Real Estate Investment Trust, is a type of REIT that does not trade on public stock exchanges. These investment vehicles pool capital from numerous investors to purchase and manage real estate properties and assets.
How Non-Traded REITs Work
Non-Traded REITs operate similarly to public REITs in terms of pooling investments and purchasing income-generating real estate. However, they differ significantly in terms of liquidity, transparency, and market trading:
Structure
Non-Traded REITs typically have a fixed lifespan, often ranging from five to ten years, after which they might become publicly traded, liquidate their assets, or execute a merger.
Primary Offerings
Investors purchase shares of Non-Traded REITs through broker-dealers or financial advisors rather than through stock markets. These shares are generally offered through public, but not listed, offerings approved by regulatory authorities like the SEC.
Income Distribution
Like publicly-traded REITs, Non-Traded REITs must distribute at least 90% of their taxable income to shareholders as dividends. This income primarily comes from the rental income or sale of real estate assets.
Characteristics of Non-Traded REITs
Liquidity
Non-Traded REITs are inherently illiquid, meaning shares cannot be easily sold or exchanged. Investors might need to hold onto their shares until the REIT’s specified term ends or a liquidity event occurs.
Pricing
Because Non-Traded REITs aren’t listed on exchanges, their share price isn’t subject to daily market fluctuations. Instead, prices are evaluated periodically, typically on a quarterly or annual basis, based on the underlying real estate assets’ value.
Tax Advantages
Investors in Non-Traded REITs can benefit from various tax efficiencies, including the deferral of taxes on income until distributions are received and possible deductions on depreciation of property assets.
Management and Fees
Non-Traded REITs are often actively managed by professional real estate management firms. However, these management services come with higher fees than those typically associated with publicly traded REITs.
Special Considerations
Transparency and Regulation
While Non-Traded REITs are subject to similar regulatory requirements as publicly traded REITs, issues around transparency due to less frequent public reporting can pose risks.
Suitability for Investors
Non-Traded REITs are typically suitable for long-term investors seeking diversification into real estate and can be tolerant of the illiquidity and potential risks involved.
FAQs
Who can invest in Non-Traded REITs?
How do Non-Traded REITs differ from Publicly Traded REITs?
Are dividends from Non-Traded REITs guaranteed?
Can Non-Traded REITs become publicly traded?
Summary
Non-Traded REITs offer unique access to real estate investments that may provide attractive yields and tax benefits. However, their illiquid nature, higher fees, and less transparency make them suitable primarily for informed investors with a long-term horizon.
By understanding the structure, functionality, and characteristics of Non-Traded REITs, investors can make more informed decisions regarding their portfolio diversification and real estate investment strategies.
