Are (or Were) Unsuitable Non-Traded REITs in Your Portfolio?
Learn the details about this vehicle, and why it may be an unsuitable investment
REITs, or real estate investment trusts, are companies that own real estate-related assets. These may include office parks, hotels, homes, or even related debt like mortgages. REITs are an attractive investment because they can often provide a steady stream of income to investors, as the IRS mandates that they distribute at least 90% of their taxable income to shareholders.
Most REITs are publicly registered and publicly traded on major stock exchanges – however, some are not publically traded. These non-exchange traded REITs are usually managed by a private investment manager, and they can be much riskier than their tradable cousins.
Non-exchange traded REITs often lack liquidity
Unlike regular REITs, you often cannot simply sell a non-traded REIT if you need the cash. In some cases, a certain number of shares may be redeemed per year, but you might be offered less than you paid for them. In other cases, you may have to wait years for the REIT to become listed on an exchange before you can sell it. According to the Financial Industry Regulatory Authority (FINRA), many investors have to wait for up to eight years to cash out their non-traded REIT for its full value.
Non-traded REITS often erode in value
The regular payments made by non-traded REITs are often one of the main reasons investors decide to purchase them. However, in certain cases, these distributions are heavily subsidized by the investor’s principal. Therefore, you may not get a great return on your investment – the REIT is simply giving you back some of your money that you could have invested elsewhere.
In comparison, payments made by exchange-traded REITS are almost always made completely from actual real-estate investment profits, meaning that you’ll be getting a clearly-defined return.
Non-exchange traded REITs charge higher fees
Non-traded REITs often charge significant upfront fees, which can greatly devalue your lifetime returns from the investment. These fees, combined with distributions from the REIT’s principal (money you helped contribute to), mean that investors are often better off purchasing an exchange-traded REIT or simply choosing a different type of investment altogether.
Non-exchange traded REITs are difficult to value
Non-traded REITs are considered a finite-life investment, which means that at the end of a certain period, the fund is required to either become listed on a public exchange or to liquidate. At this point, the company may have lost some money or the fund may have nothing at all. Because non-traded REITs are so difficult to value and cash out, it may be hard to determine if one is losing money – and if it is, there may be little you can do about it.
Non-traded REITs are unsuitable for many investors
Liquidity, ease of valuation, and low fees are three elements of a safe and economical investment; unfortunately, many non-exchange traded REITs possess none of these traits. They are hard to cash out, difficult to value, usually carry high fees, and often end up simply paying you back part of your own money instead of investing it for greater returns.
While non-exchange traded REITs or certain brokers who advocate them may try to entice investors with the potential of large distributions, many individuals are better served by placing money in safer and more transparent investment products – and any broker or financial advisor has a responsibility to keep suitability in mind when serving their clients. Unsuitable advice occurs when brokers recommend securities that do not fit with a client’s investment goals or financial situation – which usually involves investments with an inappropriate level of risk or needless expense.
If you are considering investing in non-exchange traded REIT, FINRA advises investors to “be prepared to ask questions about the benefits, risks, features and fees.” And if you think your broker or financial advisor has provided unsuitable investment advice, you may be able to recover your losses through securities arbitration.
The attorneys at Silver Law Group are leaders in the field of FINRA and securities arbitration. We represent individual and institutional investors across the United States who have lost money at the hands of a trusted financial advisor. Our services are provided on a contingency-fee basis, which means we are only compensated if there is a recovery of losses. For more information, contact us for a complimentary consultation.