Definition
A Non-Traded Real Estate Investment Trust (REIT) is a type of REIT that is not listed on any public stock exchange. These investment vehicles allow investors to gain access to real estate assets and enjoy the tax benefits associated with REITs, such as a requirement to distribute approximately 90% of their taxable income to shareholders, which, in turn, allows them to avoid double taxation (no taxes at the entity level). Unlike publicly traded REITs, Non-Traded REITs offer a private, less liquid investment experience. Investors should be aware of the higher investment fees and lack of liquidity compared to exchange-traded REITs.
Examples
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Long-Term Investment Strategy: Ellen wished to invest in real estate securities but could not find an issue that she considered appealing. She found an investment firm with a good reputation and an excellent track record that offered shares of a Non-Traded REIT. Although she realized that the shares would be difficult to sell, that was not a great concern since she was committing long-term investment funds.
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Income Diversification: Tom, an investor looking to diversify his investment portfolio aiming for steady income streams, considered Non-Traded REITs appealing because they often pay regular dividends. Despite liquidity concerns, the regular income benefits associated with dividends justified the investment in Tom’s case.
Frequently Asked Questions
What are the main benefits of investing in Non-Traded REITs?
- Tax Advantages: Non-Traded REITs often function as pass-through entities, avoiding double taxation.
- Diversification: They provide an avenue to diversify investment portfolios into real estate.
- Consistent Income: Many Non-Traded REITs offer regular dividend payments.
What are the disadvantages of Non-Traded REITs?
- Lack of Liquidity: Shares in Non-Traded REITs are not easily sold, lacking the liquidity found in publicly traded REITs.
- High Fees: Commonly, Non-Traded REITs carry higher fees for management and setup compared to exchange-traded options.
- Complexity: These investments may require more due diligence and understanding.
How can investors sell Non-Traded REIT shares?
Investors usually lack direct market access to sell shares of Non-Traded REITs. Sales can involve buy-back programs initiated by the REIT, secondary market transactions, or waiting for a liquidity event, such as an acquisition or reaching public market listing.
Are Non-Traded REITs suitable for all investors?
No, Non-Traded REITs tend to be more suited for investors with a long-term horizon and those who can tolerate illiquidity and higher fees. It is critical for prospective investors to assess their risk tolerance and investment goals.
- Real Estate Investment Trust (REIT): A company owning, operating, or financing income-producing real estate that distributes the majority of annual income to shareholders.
- Limited Partnership: A partnership consisting of general and limited partners, with limited partners typically enjoying liability protection.
- Diversification: A risk management strategy that mixes different investment types in a portfolio.
- Liquidity: The ability of an asset to be converted into cash quickly without affecting its price.
Online Resources
- Investopedia: Articles on basics and advanced topics concerning REITs - Investopedia
- The National Association of Real Estate Investment Trusts (NAREIT): Information on various types of REITs - NAREIT
- Securities and Exchange Commission (SEC): Regulatory guidelines and investor advisories - SEC
References
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“Real Estate Investment Trusts: Structure, Performance, and Investment Opportunities,” Richard Feldman and Patrick J. Hoban.
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“Investing in REITs,” Ralph L. Block.
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U.S. Internal Revenue Service. “Publication 535: Business Expenses,” Chapter on Depreciation.
Suggested Books for Further Studies
- “Real Estate Investing for Dummies,” Eric Tyson and Robert S. Griswold.
- “The Intelligent REIT Investor: How to Build Wealth with Real Estate Investment Trusts,” Brad Thomas and Stephanie Krewson-Kelly.
- “REITs For Dummies,” Brad Thomas and Dana Warren.
Real Estate Basics: Non-Traded REIT Fundamentals Quiz
### What does "Non-Traded" in Non-Traded REIT suggest about its stock?
- [x] It is not listed on any public stock exchange.
- [ ] It doesn’t distribute dividends.
- [ ] It can be traded at any time without restrictions.
- [ ] It is involved in non-profit activities.
> **Explanation:** Non-Traded REITs are not listed on any public stock exchange, providing privacy and tax benefits, albeit lacking the liquidity of publicly traded REITs.
### Why might some investors prefer Non-Traded REITs despite their lack of liquidity?
- [ ] They do not pay taxes.
- [x] They offer regular dividend payments and tax benefits.
- [ ] They are risk-free investments.
- [ ] They are traded daily.
> **Explanation:** Some investors appreciate Non-Traded REITs for their potential steady income through regular dividend payments and the tax benefits associated with REIT structures.
### What are the common disadvantages of Non-Traded REITs?
- [ ] Low dividends and instant liquidity.
- [x] High fees and lack of liquidity.
- [ ] High-risk but high rewards.
- [ ] Government intervention and low returns.
> **Explanation:** Non-Traded REITs typically face high fees and a significant lack of liquidity, making them less accessible compared to publicly-traded counterparts.
### How can investors usually sell their Non-Traded REIT shares?
- [x] Through buy-back programs, secondary markets, or awaiting a liquidity event.
- [ ] By listing them on public exchanges.
- [ ] By putting up advertisements.
- [ ] Selling to government institutions.
> **Explanation:** Non-Traded REIT shares are typically sold through internal buy-back programs, secondary markets, or are held until a liquidity event occurs.
### Who are Non-Traded REITs best suited for?
- [ ] Short-term investors seeking quick gains.
- [ ] Investors looking for immediate liquidity.
- [x] Long-term investors with a tolerance for illiquidity.
- [ ] Those seeking tax-free returns.
> **Explanation:** Non-Traded REITs are best suited for long-term investors who can tolerate illiquidity and are in search of steady income benefits and tax advantages.
### Do non-traded REITs offer the same diversification as standard publicly traded REITs?
- [ ] Never, since they only invest in one sector.
- [ ] Only if they are government-approved.
- [x] Yes, they can offer portfolio diversification by investing in multiple types of real estate.
- [ ] No, they cannot offer diversification at any time.
> **Explanation:** Non-Traded REITs offer diversification benefits similar to their publicly traded counterparts by potentially investing in various types of real estate.
### What is a significant feature that distinguishes Non-Traded REITs from Limited Partnerships?
- [ ] Non-traded REITs are involved in commodities trading.
- [ ] Limited Partnerships offer daily share price reporting.
- [x] Non-Traded REITs pass through tax benefits without liquidity on public stock exchanges.
- [ ] Limited Partnerships have unlimited liability.
> **Explanation:** A significant distinguishing feature is the ability of Non-Traded REITs to pass through tax benefits without being listed on public stock exchanges, offering specific privacy and fee advantages similar to Limited Partnerships.
### When were Non-Traded REITs first allowed by legislation?
- [ ] Since inception.
- [x] By the Tax Reform Act of 1986.
- [ ] From 1950.
- [ ] After the Global Financial Crisis 2008.
> **Explanation:** Legislation allowing Non-Traded REITs was first introduced under the Tax Reform Act of 1986 to offer more diverse options for real estate investments.
### What is a typical use of funds from a Non-Traded REIT in real estate?
- [ ] Investing only in residential properties.
- [ ] Exclusively in rural lands.
- [x] Purchasing, managing, or financing real estate assets.
- [ ] Solely speculative trading.
> **Explanation:** Typical uses of funds from Non-Traded REITs include purchasing, managing, or financing real estate assets, providing investors access to diverse real estate holdings.
### What aspect of Non-Traded REITs might appeal to those seeking stability in their investment returns?
- [ ] Fixed interest rates without variability.
- [x] Regular dividend payments.
- [ ] Government-backed guarantees.
- [ ] Complete asset protection.
> **Explanation:** Investors seeking stability might be attracted to Non-Traded REITs due to their regular dividend payments from the entity’s earnings.
