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.