Real estate investment trusts (REITs) have been around for quite some time. The best known of these are publically-traded companies, such as Simon Property Group or Boston Properties, which own and manage real estate, while distributing most of their earnings to shareholders through regular dividends.

To invest in such REITs, one can buy the stocks of these companies directly, or through a mutual fund or index fund. Either way, the value of the investment is determined by the price of the REIT stock(s), which may overvalue or undervalue the intrinsic value of the underlying real estate. And, unlike the properties they own, REIT stocks are just as volatile as any other stock.

As the name suggests, non-traded REITs do not have stock that is traded on a stock exchange. Instead, investments are made directly into the REIT with the price being determined through appraisal of the underlying properties. At times when publically-traded REITs are overvalued, investing at the underlying asset value is a distinct advantage.

Furthermore, shares of the non-traded REIT are only as volatile as the real estate they own. Pools of income-producing properties with long-term leases to creditworthy tenants can offer a high level of both income and price stability.

Non-traded REITs also offer an income advantage over publicallytraded REITs. The dividend yield on the non-traded REIT we recommend is currently 5.6%. This compares to a current yield of just 3.8% on the Vanguard REIT index fund, a cap-weighted index of U.S. publically-traded REITs. In addition, this income is paid on a monthly basis, which is especially appealing for those needing a consistent stream of income from their portfolio.

While we think adding non-traded REITs to a diversified portfolio makes sense for a number of investors, there are certainly risks and other considerations that need to be factored into the decision. For one, most non-traded REITs offer only limited liquidity. So investors should consider non-traded REITs a long-term investment. Secondly, non-traded REITs will use different amounts of leverage, or borrowing. The more debt that is used in financing, the riskier the REIT will be for investors. The debt used in our preferred non-traded REIT does not exceed 60% of the equity value, which we feel is a reasonable level.

Please talk to us about the opportunities and risks involved in nontraded REITs. During this period of historically low bond rates, a stable, higher-yielding investment in non-traded REITs may be an attractive alternative for investors seeking income.

Hank Nicholson, CFP
Chief Investment Strategist
The information contained in this blog is general in nature and is intended for informational purposes only. Furthermore, this information should not be construed as a buy or sell recommendation. All expressed opinions are subject to change without notice. Because the facts and circumstances surrounding each investor’s situation differ, you should consult your financial advisor before taking any action based on this information.