Tempted to Invest in a Non-Traded REIT?
By Ric Edelman
The facts may change your mind
You’ve probably heard the pitch: Take advantage of low real estate prices by pooling your money with other investors to buy real estate through a non-traded real estate investment trust (REIT). You’ll get steady income from the rental income and you’ll make a profit when the trust sells the properties for higher prices in the future. You can’t lose!
Except that you can.
While REITs are common investment products — they are an easy and popular way to add real estate to your invest¬ment portfolio — non-traded REITs are a bit different. Although REITs trade daily, typically on the New York Stock Exchange, non-traded REITs do not. As a result, many are illiquid; in those cases, once you invest your money, you can’t withdraw it for at least seven to 10 years. Should you have to make a withdrawal, you’ll incur substantial penalties, surrender charges and a possible loss of principal — assuming you can sell at all.
Most REITs, like mutual funds, are generally available from any financial advisor, but non-traded REITs are generally available only from the firms that create them. Many hire their own brokers to sell these products to investors, and the brokers often earn high commissions as enticements to close the sale. This can create a conflict of interest between the brokers and their customers.
If you are ever offered the opportunity to invest in a non-traded REIT, proceed with caution.