Non-traded REITs provide retail investors with access to exclusive real estate investments and tax benefits, separate from public exchanges.
Key Takeaways
- Non-traded REITs offer unique access to specialized real estate investments and beneficial tax treatments.
- Despite not being publicly listed, these REITs must be registered with the Securities and Exchange Commission (SEC) and comply with regular regulatory filings.
- They operate under stringent IRS rules, including the requirement to disburse at least 90% of their taxable income to shareholders.
Understanding Non-Traded REITs
A non-traded REIT is a distinct approach to real estate investment intended to minimize taxes while delivering potential returns from property investments. These REITs do not trade on public securities exchanges, resulting in significantly higher illiquidity. Front-end fees can be steep—reaching up to 15%—due to limited secondary market options.
The goal of any REIT is to generate income from its real estate holdings, primarily through rental income. Initially, the specific properties a non-traded REIT invests in might remain unknown to investors. Early investments often occur through a blind pool, leaving participants unaware of the properties being acquired for the REIT’s portfolio.
Early redemption triggers substantial fees that erode total returns. Like their publicly traded counterparts, non-traded REITs adhere to IRS rules that mandate returning at least 90% of taxable income to shareholders. Investors are typically drawn to both traded and non-traded REITs for the consistent income distributions they offer.
Despite the lack of public listings, non-traded REITs are obligated to register with the SEC and furnish regular periodic regulatory filings. These filings encompass quarterly and annual reports, along with a prospectus.
Non-traded REITs may remain illiquid for extended periods post-inception. This prolonged liquidity makes it difficult to rely on early steady income. Distributions to shareholders in the early phases might be heavily financed through borrowing, and these payments are not guaranteed. A REIT’s board has the authority to determine both the distribution occurrence and amount. Initially, the distributions are often funded entirely from the invested capital.
Many non-traded REITs come with a predefined finite life span, after which they must either list on a national exchange or liquidate. The investment’s value at liquidation might have diminished significantly.
Related Terms: REIT, taxable income, Securities and Exchange Commission, secondary market.
