Non-traded REITs vs. publicly traded REITs

[Gardnr]

Ray Lucia regularly touts non-traded REITs as an excellent income investment primarily because they don't have the volatility of traded REITs. These things apparently have big commissions up front and high fees as well, compared to traded REIT funds and ETFs. And they have very little liquidity, tying up your money for many years. Which is fine if you understand that going in, but it is a downside.

He says that they're a great comfort in this market while everything else is taking a dive. But I find that to be absurd really because the value is changing but they don't get marked to market like traded REITs. Just because you don't know the current value doesn't mean they haven't fallen in value. It just seems to be an "ignorance is bliss" mindset that really is just self delusional.

I could achieve the same thing if I just chose not to look at the current value of my traded REITs, or my stocks/funds for that matter.

I enjoy listening to his radio show for the most part but this one thing has really been bothering me. Every time I hear him talk about this I shake my head. Maybe some day I'll call him up and try to put him on the spot about it.

Anybody own these or have some different perspective that I'm missing?

[Rich_by_the_Bay]

I share your reservations, though I am a bucketeer. I think that non-traded REITs are the annuities of real estate: big up-front cost in commissions, money tied up a long time, probably do well but not as well as stocks and a little better than bonds. And while he touts them as indestructible, I don't think that is plausible in the modern era.

I don't own any, though I do own some traded REITs. These are in a rough patch, are very volatile, but seem to have little correlation with other indices.

[harley]

I've got a non-traded REIT, from before I decided to take over my investments. I'm sort of stuck in it right now, because they decided not to go public or liquidate because the market was sucky. So we don't know the actual value at this point. On the good side, it throws off a ton of dividends, which I am redirecting back to my bank as a start on setting up my cash flow. I will get out eventually, when I get a chance. But for now it's working out for me, since I've already paid the big commissions and I can use the dividends. But Rich is right, they are the annuities of RE.

[haha]

The whole idea that because something is non-traded it is more valuable is either lunacy or an aid to robbery. I can see why a FA would like it. Big fees, and no way to know how well things are progressing. By the time the investor knows something is wrong, it is likely too late.

Investment real estate is bought either by wealthy individuals and partnerships or various institutions including REITs. They are all fishing in the same pond. Given similar skill levels, their returns will be similar, except that fees and loads may vary. How could higher fees improve results? The other variable is deal structure- especially amount of leverage. But there is no magic anywhere. Just look a what happened to Blackstone with the Equity Office portfolio they bought from Sam Zell.

And liquidity itself is a benefit that would be expected to add to the value of an investment.

If people don't like to know how their investments are doing (except when they suspect that they are doing well) they can just join this forum and and distract themselves with shareing pictures of their feet.

Ha

[teejayevans]

If I wanted income, I would consider non-traded.

What I don't like is how are the non-traded priced
when you do want to cash them in? Does anybody
know?

If I don't want income and I'm investing for long
term, I would go with traded.

[Gardnr]

Quote:

Originally Posted by teejayevans If I wanted income, I would consider non-traded.

Why? You can get the same kind of income from traded. And right now you can get unbelievable yields as they've been marked down as much as 80%.

Quote:

What I don't like is how are the non-traded priced when you do want to cash them in? Does anybody know?

Nope, I don't know how it works if you want to get out "early." I can only imagine that you would get a lousy price, paying dearly for the early exit.

[Gardnr]

Quote:

Originally Posted by haha The whole idea that because something is non-traded it is more valuable is either lunacy or an aid to robbery. I can see why a FA would like it. Big fees, and no way to know how well things are progressing. By the time the investor knows something is wrong, it is likely too late. Investment real estate is bought either by wealthy individuals and partnerships or various institutions including REITs. They are all fishing in the same pond. Given similar skill levels, their returns will be similar, except that fees and loads may vary. How could higher fees improve results? The other variable is deal structure- especially amount of leverage. But there is no magic anywhere. Just look a what happened to Blackstone with the Equity Office portfolio they bought from Sam Zell. And liquidity itself is a benefit that would be expected to add to the value of an investment. If people don't like to know how their investments are doing (except when they suspect that they are doing well) they can just join this forum and and distract themselves with shareing pictures of their feet. Ha

Exactly my thoughts. At some point I think the RL is risking his credibility by touting these things so hard these days.

[Rich_by_the_Bay]

Quote:

Originally Posted by Gardnr At some point I think the RL is risking his credibility by touting these things so hard these days.

It definitely lowers his credibility in my eyes; he is already pretty self-promoting and this only reinforces that.

Ray is smart, entertaining, and cocky and he comes across as greedy sometimes, too. But I don't think he gives bad advice and comes up with some creative answers.

For all of that, I have found that his Buckets strategy, with individual modification, has benefited me greatly -- especially in the storm. Non-traded REITs are not part of it for me.

[treypar]

Non traded Reits do not make any sense to me. You never know what the value really is and I assume that they do not report financial results like public REITS. How can you ever know how your non traded REIT is really performing or what the real value is. Also how do you know if you will ever get your investment back when and if it is ever disolved. At least you can sell a public REIT at any time.

[Gardnr]

Quote:

Originally Posted by Rich_in_Tampa It definitely lowers his credibility in my eyes; he is already pretty self-promoting and this only reinforces that. Ray is smart, entertaining, and cocky and he comes across as greedy sometimes, too. But I don't think he gives bad advice and comes up with some creative answers. For all of that, I have found that his Buckets strategy, with individual modification, has benefited me greatly -- especially in the storm. Non-traded REITs are not part of it for me.

Agreed. I love the strategy. It's a really good way of organizing your retirement portfolio and the withdrawal phase. It's helped me come up with an AA that doesn't feel so arbitrary (like the 100-age or similar techniques do).

I think that his advice to have a REIT allocation is good. But the non-traded approach is not the way to go, IMO.

[teejayevans]

Quote:

Originally Posted by Gardnr Why? You can get the same kind of income from traded. And right now you can get unbelievable yields as they've been marked down as much as 80%.

Good point. One question is why do the Yale, Harvard, etc trust funds
invest heavily in the nontraded REITs?? (at least according to RL)
TJ

[FinanceDude]

Quote:

Originally Posted by teejayevans Good point. One question is why do the Yale, Harvard, etc trust funds invest heavily in the nontraded REITs?? (at least according to RL) TJ

Because large institutional investors like those foundations have the leverage to mitigate risk, moreso than an individual investor. Plus, they have many millions a year coming in, so a mistake can be lessened by the brunt of new money..........

[FinanceDude]

Quote:

Originally Posted by Rich_in_Tampa It definitely lowers his credibility in my eyes; he is already pretty self-promoting and this only reinforces that. Ray is smart, entertaining, and cocky and he comes across as greedy sometimes, too. But I don't think he gives bad advice and comes up with some creative answers. For all of that, I have found that his Buckets strategy, with individual modification, has benefited me greatly -- especially in the storm. Non-traded REITs are not part of it for me.

I think Lucia and Burns have sold out to commercialization.......

[Free To Canoe]

Quote:

Originally Posted by Rich_in_Tampa I share your reservations, though I am a bucketeer. I think that non-traded REITs are the annuities of real estate: big up-front cost in commissions, money tied up a long time, probably do well but not as well as stocks and a little better than bonds. And while he touts them as indestructible, I don't think that is plausible in the modern era.

Well said. I share the the general negative opinion about non-traded REITs. In Pioneering Portfolio Management: A Fundamental Approach to Personal Investment by David F. Swensen, he goes into detail on the concerns of private (therefore non-traded) REITs. He gives one good example, TIAA CREF REIT and one horror story to make his point. Many of his points are itereated in the above posts.

Free to Canoe

[mathjak107]

i use both traded and untraded. they are very different from each other.

a traded reit is like a stock , it trades on greed ,fear and perception of the future. it may never trade anywhere near its real value.... they are amazingly volatile. my icf can move 10% in one afternoon...and down 60% or so from the high ,,,,,, no way real property moves like that from day to day

untraded on the other hand is more like a bond fund. its dividend is based on real world income ( watch your prospectus) and its value when liquididated is its actual value. its a real investment in brick and motor complete with a depreciation allowance..its about as close to a partnership in real property as you can get without actully buying it on your own ..the one i use has a 7 year time frame , its sold at the end. if your not going to be in it for 7 years dont bother

i dont know any investment in real brick and morter that has no closing costs and the untraded reit does have some costs to get in . again watch your prospectus.

i had one from 2000-2007 and got a nice fat juicy 8% dividend when money markets were at 1% and the market was tanking in stocks.

we sold last year for an average overall return of 17% per year over the last 7 years including the fees, not tooo shabby for an investment that didnt change every day giving me a roller coaster ride to no where

all with no volatility.... i rolled it back into another one of the apple hospitality reits and am getting 8-1/2% divident plus a real life depreciation write off against the income...

before you poo poo untraded reits you have got to check into some of them more thoroughly.

comparing public reits to untraded reits are comparing 2 very different investments. my ICF public reit is in my stock bucket, my apple reit is right at home in my bond bucket

think of an untraded reit as a bond on steroids, the fact that you may make money when sold is an added bonus if it happens..

[saluki9]

Quote:

Originally Posted by atlanta Non traded Reits do not make any sense to me. You never know what the value really is and I assume that they do not report financial results like public REITS. How can you ever know how your non traded REIT is really performing or what the real value is. Also how do you know if you will ever get your investment back when and if it is ever disolved. At least you can sell a public REIT at any time.

Well, you know what they say about assuming

They are all required to provide quarterly financials and audited statements annually.

Also, much of the up front costs can be avoided by buying them from a fee based advisor most of which sell them for a small up front charge as opposed to the 7-10% commissions paid when buying from the brokerage side.

[saluki9]

Quote:

Originally Posted by Rich_in_Tampa I don't own any, though I do own some traded REITs. These are in a rough patch, are very volatile, but seem to have little correlation with other indices.

How do you figure?

VGSIX is running over a .9 correlation with the major equity indexes now.

[Rich_by_the_Bay]

Quote:

Originally Posted by saluki9 How do you figure? VGSIX is running over a .9 correlation with the major equity indexes now.

In my looking at VNQ to VT the former seems to fluctuate twice as far in either direction compared to VT, though now that you mention it the directions seem similar, just not the amplitudes.

But it is a casual observation, I admit.

[harley]

Well, my non-traded REIT is the only consistant source of income I have at this point. Definitely not liquid, as in I can't get my money back until they say so. But the 7% dividend is nice, and I'm going to direct it to my bank instead of reinvest after Jan 1 (tax issues). That being said, I'm not sure if it was a good investment or not. I got it many years ago before I had a clue. I'm going to see if I can figure out the costs and commissions. I'll probably sell out when I can, but then I have to try to find something else equally rewarding to act as my cash flow.

[jimnjana]

One of my small cap REITs just merged with an affiliate company, common shares were exchanged 1:1 new shares are not traded, company does not expect liquidity event for next few years. I chose to buy more shares on weakness prior to merger taking place. Now company stock is valued at zero, as there is no market for it. Mgt in this case are excellent property developers and managers, not so good at understanding stock valuation and management. Founder and CEO owns about 20% or so of shares, top managers own considerable portion of share float. Going private and consolidating four different classes of stock and merging with affiliate is there way of trying to enhance the company's ability to borrow funds and attract investment dollars. I guess I'll see if it pays off. Not your typicial non traded REIT, but I thought it is an interesting situation, one that other small cap REIT investors may find themselves in. In my case, I was a long time investor in the company and have high degree of confidence that mgt has common share holders interests at heart and so I am prepared to wait current situation out, collecting my monthly dividend check as I wait.