Non-traded real estate investment trusts (REITs) continue to be a popular
investment in the current market, but many people don't understand
how they really work. The potential for financial harm can be high if
you put your money into an unsuitable non-traded REIT and don't take
into account how well it works in your overall financial picture.
What Is an REIT?
An REIT is a real estate investment through a corporate entity. Corporate
taxes are avoided with a REIT, but 90% of the income must be distributed.
They come in two main types:
- Exchange-Traded REITs
- Non-Traded REITs
The first is traded on an exchange, and the share price changes according
to market fluctuations. The latter, on the other hand, does not trade
on a public exchange. A broker can show the purchase price of the REIT
(typically $10 per share) for a long time before establishing a market
value. Although the broker only has 18 months after the offering period
ends to establish the market price, the offering period is often as long
as 3 years or more. This means the purchase price could be reported for
as long as 4 or 5 years before a market price is established. During that
time period, investors may have a tough time figuring out what the real
value of the REIT is.
Additionally, the amount actually invested in the REIT could be as much
as 15% less than you put up. Some of the cash goes into commissions to
the broker, and some will go into various up-front fees. Even though these
amounts are subtracted, the brokerage statement will still show the value
of the REIT as through those fees and commissions were not subtracted.
For example, a $10 REIT that sold 10,000 shares would be reported to be
worth 100,000—even though the actual amount invested could be more
than $10,000 less! The Financial Industry Regulatory Authority (FINRA)
would like to see this practice ended, and has proposed a new rule requiring
that non-traded REITs show this deduction. In the meantime, investors
should be aware of these complex investments and ask their brokers about
any fees or commissions involved.
Watch Attorney Courtney Werning's video to learn more about the dangers
of non-traded REITs.
As you can see, REIT investments get complex fast, and they may not be
suitable investments for every investor. Be sure to always carefully research
REITs and understand what you're putting your money into and how you'll be paid.