How can I get real estate exposure in my investment portfolio safely?
The Dangers of Non-Traded REITs
A non-traded real estate investment trust, also known as a REIT, is a product
that takes your money and invests it in real estate. Promoters say this
rental income will be sufficient for you to get a sizeable annual return,
and, according to the common sales pitch, after seven to ten years the
property will be sold and you will get your money back. You might even
get more if the property is sold for a profit.
Non-Traded REITs: Investments You Should Never Make
In order to buy a non-traded REIT, you have to pay commissions and fees
that often total 15% of your investment, and can be difficult to identify.
If you want to sell – you can’t. These investments don’t
have a market, and they aren’t traded. This means you have to wait
for the promoter to sell the underlying real estate and return your money
to you. It can take a decade or more before you see your investment again.
Despite the lack of liquidity, the promise of a sizeable annual return
has enticed many people to invest. The top 20 non-traded REITs held about
$67 billion as of the second quarter of 2014. In those three months alone,
investors put $4 billion more into them, and it’s no wonder why
brokers love to sell products. That $4 billion generated about $600 million
in fees and commissions for the brokers and brokerage firms.
It also means that only 85 cents of every dollar you invest is actually
used to buy real estate. When you invest $100,000, you only own $85,000
worth of the property. That property has to rise 18% in value in order
for you to be able to get back the original $100,000 that you invested.
Consider Mutual Funds Instead
If real estate exposure is what you’re looking for in your investment
portfolio, mutual funds provide investors with:
- Professional management with established track records
- Access to a wide variety of real estate markets
- Transparent pricing
- Ready liquidity
While brokers and advisors may have a good faith basis for recommending
that a client make a focused real estate investment, in our opinion, they
cannot justify a recommendation to purchase a non-traded REIT. Clients’
interests are better served by investments in low-cost and low-liquid
funds managed by individuals with expertise and incentives to construct
diversified portfolios of the best real estate investments.