Unlisted Real Estate Investment Trusts (REITs) versus Listed REITs

Differentiating between Non-traded REITs and Traded REITs:

Investing in Real Estate Investment Trusts (REITs) can be lucrative, as they often yield more than typical bonds. This makes them appealing to investors seeking income. Furthermore, REITs provide the possibility of your investment increasing in value.

For many investors, investing in publicly-traded equity REITs is straightforward. However, depending on factors such as income and wealth, some investors might consider investing in private or non-traded REITs. It could be beneficial for some investors to allocate a portion of their wealth to these non-traded REITs.

Let's delve deeper into the differences between traded and non-traded REITs, and factors to consider before deciding where to invest.

What is a REIT?

What does a REIT mean?

A REIT (pronounced "ree-it") is a unique corporate structure for businesses that own, manage, develop, or operate real estate. REITs make real estate investment more accessible to a larger pool of investors.

By creating a corporation that benefits from certain tax advantages, REITs help level the playing field for retail investors looking to capitalize on the income and wealth-building potential of commercial real estate. Purchasing a full property is beyond the financial reach of most people. However, with a REIT, you can buy a part of one.

To meet REIT requirements, a company must:

Derive at least 75% of its income from rental income or other real estate activities.
Have 75% of its assets in real estate.
Have at least 100 shareholders.
Not be more than 50% owned by five or fewer individuals.
Distribute at least 90% of its net income as dividends.

By fulfilling these qualifications, a REIT qualifies as a "pass-through" entity, exempt from paying corporate income taxes. The resulting increased cash flow enables it to pay out higher dividends to investors.

Traded REITs

What is a publicly-traded REIT?

A publicly-traded REIT is traded on a major stock exchange, like the New York Stock Exchange or NASDAQ. They offer high liquidity. Many notable REITs experience tens or hundreds of thousands of shares traded daily.

Additionally, traded REITs are open to investors of all types. All you need is a brokerage account, preferably with a low-cost online broker, and the funds to purchase shares.

Traded REITs are the most popular way for individuals to invest in real estate.

-Highly liquid.-Easily accessible to investors of all types.-SEC regulatory oversight reduces risk for individual investors.

Construction stocks

These slow-growing stocks can accumulate wealth over time.

Lumber stocks

-More volatile than other options.-Subject to market valuation swings like other equities.-Lack of required holding period can result in selling for a loss during market downturns.

This essential commodity is vital for construction and homebuilding.

Retail stocks

We all shop, and these companies sell goods across various industries.

Housing stocks

There are many smart ways to invest in the thriving housing market.

Non-traded REITs

-May offer higher-return investments than available on public markets.-Long-term holding period helps management focus on long-term strategy.-Reduced regulatory oversight means lower operating costs, which can boost returns.

What are non-traded REITs?

There are two types of non-traded REITs: private REITs and public non-listed REITs (PNLRs).

Let's begin with private REITs. They share several significant differences with public REITs.

-Accredited investor requirement eliminates accessibility for most individuals.-Large minimum investment requirements further reduce investor pool.-Limited or no redemption plan may make it difficult or impossible to sell.

First, they are not traded on a public exchange. Investments are made via private placements or direct solicitation of investors. Private REITs often have strict holding requirements, meaning you may be required to hold your stake for five or more years with no resale option in place. If redemption is available, it may be at a discount to the REIT's value.

Second, only accredited investors are legally permitted to invest in these kinds of REITs. To be accredited, you must meet certain income and/or net wealth minimums. Private REITs typically cater to large, institutional investors such as pension funds and organizations with substantial endowments.

Lastly, private REITs are not required to register with the Securities Exchange Commission (SEC). This means they do not file financial reports, resulting in reduced oversight and higher risk for individual investors without the resources or expertise to assess the suitability of individual companies.

As a result, private REITs are generally not accessible to most investors and would not make for an ideal investment opportunity even if they were.

Public non-listed REITs (PNLRs) fall between publicly traded and private REITs.

They do not trade on stock exchanges and typically share the same redemption limitations as private REITs. However, they are registered with the SEC and provide publicly accessible financial filings that are audited by approved accountancy firms. Additionally, they are often subject to oversight by state securities regulators.

-Potentially higher-quality investments available.-Required to submit financial disclosures -- including audited annual filings -- to the SEC; also subject to state regulatory scrutiny.-Lack of public trading and long-term holding requirement can help management focus on long-term strategy.

Due to increased regulatory oversight, PNLRs are more accessible to most individual investors.

REIT Category | Advantages | Disadvantages------------------|------------------|------------------Public REITs | - They offer high liquidity and easy accessibility to various investors. - SEC regulatory supervision reduces individual investor risk. | - They can be more volatile than other options. - They are susceptible to market valuation fluctuations like other equities. - A lack of holding period may result in selling for a loss during market downturns.Private REITs | - They may provide higher-return investments than those available in public markets. - A long-term holding period allows management to focus on long-term strategies. - Reduced regulatory oversight results in lower operating costs, which can boost returns. | - They are only accessible to accredited investors. - High minimum investment requirements limit the pool of investors. - There may be no redemption plan, making it difficult or impossible to sell.Public Non-Traded REITs | - They can offer access to higher-quality investments. - They are required to submit financial disclosures to the SEC, including annual audited filings and state regulatory scrutiny. - Lack of public trading and long-term holding requirements help management focus on long-term strategies. | - They require substantial minimum investments. - They incur broker fees and commissions. - Holding period requirements may not align with individual investors’ goals.

Your choice

-Minimum investment requirements.-Broker fees and commissions.-Minimum holding period requirements may not match up with individual investors’ goals.

Traded or non-traded REIT? It's all about you.

Traded REITs are typically the best option for most individual investors, especially those who are less experienced. These investors may be unfamiliar with real estate investing or may not have the income, net wealth, or disposable capital to invest in non-traded REITs.

Fees for public, non-traded REITs can be high for investors without accredited investor status. These types of investments are usually made through a local broker who earns a substantial commission on the sale of such REIT investments. If you need to exit this investment, it can be challenging and may result in selling at a discount to the market value of the investment, incurring additional broker fees.

However, there are investors with substantial net wealth, disposable capital, and the ability to invest for an extended period without needing access to that capital. Non-traded REITs can present unique opportunities for higher-yield and higher-return investments for these investors.

The best option for you depends on your knowledge, experience, and financial situation. For most investors, traded REITs are the ideal choice. However, as wealth and experience grow, you may discover a compelling non-traded REIT opportunity that suits your needs.

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After considering the various types of REITs, some investors might also consider diversifying their portfolio by investing in other financial instruments. This could include buying stocks in construction companies that provide materials necessary for building, such as lumber companies or housing-related stocks.

Moreover, for those who have a substantial income and wealth, they might want to explore the possibility of investing in private or non-traded REITs. These investments, especially private REITs, may offer the potential for higher returns compared to publicly-traded REITs, due to lower operating costs and a longer-term strategy focus.