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Non-Traded REITs Too Risky for Most Investors, Says FINRA

David P. Meyer

According to an investor alert released last week by FINRA, most investors should steer clear of non-traded real estate investment trusts (REITs) if they want to build their nest eggs.

"Non-traded REITs are rarely, if ever, suitable for short-term investors and even long-term investors must be willing to bear the risks of illiquidity," warned FINRA in "Public Non-Traded REITs-Perform a Careful Review Before Investing."

The products, which are increasing in popularity, appeal to investors who are seeking strong yields in the face of a volatile stock market and low interest rates. Unfortunately, they carry a great deal of risk, more so even than exchange-traded REITs - a fact not all investors seem to understand.

"While non-traded REITs and exchange-traded REITs share many features in common, they differ in several key respects," warned FINRA. "Most significantly... shares of non-traded REITs do not trade on a national securities exchange. For this reason, non-traded REITs are generally illiquid, often for periods of eight years or more. Early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total return. Furthermore, the periodic distributions that help make these products so appealing can, in some cases, be heavily subsidized by borrowed funds and include a return of investor principal. This is in contrast to the dividends investors receive from large corporations that trade on national exchanges, which are typically derived solely from earnings."

FINRA recommends that investors who are considering investing in public non-traded real estate investment trusts thoroughly understand that they will be "locking up" their investments "with only limited avenues for redemption." Additional risks and complexities include:

  • Lack of simple valuation processes.
  • Lack of guaranteed distributions.
  • Potentially significant tax consequences.
  • High fees.
  • Limited diversification.

"Only invest if you are confident the product can help you meet your investment objectives and you are comfortable with the associated risks," warned FINRA.

For additional tips and warnings, read the full investor alerthere.