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]

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%.

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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.

 

[haha]

They say the shares are worth $10, but if you can't get your money back until someone else says so, how could they be worth anything at all? Trust me, if your shares were worth $20, these guys would be tripping all over themselves to buy them back at $10.

There is a great post on this issue in the Non-Traded REIT Forum.

Broker/dealers and non-traded REIT sponsors will all go to great lengths to keep feeding $10 opium to stuporific investors. I would avoid these things at all costs.

I read the linked article. Very clear, and I might add, how could it be otherwise?

Here is my post from earlier in this thread which IMHO also pretty well nails the issues with these:

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

 

[harley]

Yeah, thanks for rubbing it in.

 

[clifp]

I'm with HaHa liquidity is good period. The Angel investment club that Nords and I are members of, is run by a sharp (perhaps too sharp) former Harvard Biz school professor. During the last 18 months he has been pushing that the investment in small companies (generally Hawaii based and High Tech) are doing better than stock market , cause they are still in business and haven't "dropped in value". This struck me as crazy since the value of equities has dropped across the board and among the hardest hit were microcap companies. Just because there isn't stock quote for startup tech company, or REIT doesn't mean they are unaffected by the events around them.

For REITs I'm sticking with solid companies like Realty Income O

 

[old guy]

I'm a new guy and I found this site by googling "non-traded REIT's. I'm a long term investor off and on of traded REIT's and have done very well with them over the past 12 years. I am also a fan of Lucia's buckets of money strategy but I have been very sceptical of his touting of non-traded REIT's because of their lack of transparently. The reason for my thread here is to give my perspective on traded REIT's. I currently own positions in 5 traded REIT's which I started aquiring during the past 12 months. Capital appreciation has been great along with a good dividend. The issues I hold are Duke Realty (DRE), First Potomic (FPO), National Retail (NNN) Realty Income (O) and HCP INC. (HCP). The average annual yeild is about 5.0% for the group and the dividend for all of them is well covered by the AFFO. The yield may be slightly less than that of the Non-traded issues currently out there but the distribution is a return on capital rather than a return of capital and there is the benefit of liquidity. Also, the traded REIT's represent a hard asset and can serve as a hedge against future inflation. I'm not saying "Non-traded" REIT's aren't a good investment but I don't think their blind risk out weights traded REIT's transparently.
Additionally, I might suggest those of you that are income investors should look at Traded REIT preferred shares. Their yield is very good and the dividends are almost always "cumulative". If the common pays a dividend the preferred must pay their dividend. Therefore, the dividend is not qualified and is taxable at regular income rates. You should hold them in a tax advantaged account (IRA, etc.) Anyone interested in further benefits of preferred's let me know and I'll elucidate. A final word, real estate is a powerful addition to your asset allocation. It increases your overall rate of return and reduces your level of risk over time.

 

[FinancialWiz]

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?

Non-traded REITS cannot be evaluated by the same standards as publicly-traded REITS. They are a hybrid between partnerships and PTRs. They are mis-understood by many people without extensive real estate backgrounds. I don't think Ray meant the only advantage of non-traded REITS is the fact that the stock price is stable. Non-traded REITs, btw, do mark to market their values by law within 18 months after they close. Most are 'open' that is - they are accepting new investors for 3-5 years. As I write this message, fees for non-traded REITs are actually lower than publicly traded REITS, as NTRs are trading well over their net asset value - that is - the total number of shares x price is far greater than the market value of their real estate. It is common now (January 2011) for PTRs paying solid dividends to be priced some 40% or so over their NAV. That means the prices of the stock is well above the actual value of the real estate. NTR, however - today have been buying over the last couple years at very low prices and are continuing to buy at low prices. PTR - and all stocks - are priced for the future. PTRs are priced some 18 months in advance. Indeed, todays PTR values are within 10-20% of their all-time highs in 2007. But actual private real estate can be purchased today at a much greater discount than 10-20% of their 2007 value.
It is true that 88 cents or so of every dollar invested goes into the typical NTR - but with real estate being bought at huge discounts with low financing the NTR investor can do very well, indeed. NTRs also have better tax advantages than PTRs as they frequently use accelerated depreciation methods. One popular retail NTR has a 7% dividend entirely covered from immediate taxation. If liquidity is important, PTRs are certainly the way to go - but many NTRs offer solid dividends and excellent growth potential today. But the fact that the price doesn't change until after the REIT closes isn't a big deal. Don't ignore the real advantages of NTRs.