What Is a Non‑Traded REIT?
A non‑traded real estate investment trust (non‑traded REIT) is a company that owns, operates or finances income‑producing real estate but is not listed on a national securities exchange. Like exchange‑traded REITs, non‑traded REITs generally must distribute at least 90% of taxable income to shareholders to keep REIT tax status, but because they aren’t publicly traded they tend to be illiquid, carry higher upfront fees, and have different risk/return tradeoffs than listed REITs. (Source: Investopedia)
Key takeaways
– Non‑traded REITs give retail investors access to institutional real estate investments that are typically not available through public markets.
– They are illiquid for extended periods, often have high front‑end fees (sometimes up to ~15%), and may use investor capital or leverage to fund early distributions.
– Non‑traded REITs are still SEC‑registered and must file periodic reports, but they may invest via “blind pools” (investors don’t initially know the specific properties).
– Many non‑traded REITs have finite lifespans requiring a liquidity event — a listing, sale, or liquidation — after a set period. (Source: Investopedia)
How non‑traded REITs work
– Structure and objective: The REIT raises capital from investors and uses it to acquire or finance real estate (office, retail, industrial, multifamily, healthcare, etc.). Income typically comes from rents; long‑term returns aim to include income plus appreciation.
– Blind pools: Early investors may buy into the REIT before the sponsor has identified or acquired all properties. This increases reliance on the sponsor’s expertise and due diligence.
– Distributions: Boards set distribution policies. Early distributions may be funded from debt, sponsor support, or capital rather than operating cash flow, and are not guaranteed.
– Conversion or liquidation: Many non‑traded REITs carry a time horizon — at the end the vehicle must either list on an exchange, sell its assets, merge, or liquidate and return proceeds to shareholders. (Source: Investopedia)
Advantages
– Access to institutional real estate that may be difficult for individual investors to buy directly.
– Potential for steady income distributions and tax advantages associated with REIT status (pass‑through taxation; remember the 90% distribution rule).
– Professional management and scale advantages in sourcing, managing, and financing properties. (Source: Investopedia)
Major risks and disadvantages
– Illiquidity: No active secondary market. Investors may be locked in for years until a liquidity event.
– High fees: Upfront sales loads, dealer compensation, offering costs, and management fees can materially reduce investor returns (front‑end fees sometimes as high as ~15%).
– Distribution sustainability: Early distributions may be subsidized and can exceed operating cash flow; distributions can be reduced or stopped.
– Valuation opacity: Without public pricing, valuations rely on appraisals and sponsor reporting.
– Sponsor conflicts: Fees and incentive structures can create conflicts of interest (e.g., promoting acquisitions that boost fees).
– Potential for loss: At liquidation the REIT’s value may be less than initial investment or zero. (Source: Investopedia)
Fees and expenses to watch
– Upfront selling commissions / placement fees (can be large).
– Management fees (asset management and property management).
– Acquisition fees, disposition fees, financing fees, and incentive or “promotion” fees (carried interest).
– Ongoing operating and administrative expenses.
Always request a full fee table in the prospectus and calculate how fees affect projected returns. (Source: Investopedia)
Liquidity and exit paths
– Listing on a public exchange (convert to listed REIT).
– Sale of assets or the company to a buyer.
– Liquidation and return of proceeds to shareholders.
– Limited redemption or tender offers (rare and often costly, can be subject to caps).
Because outcomes and timing are uncertain, treat a non‑traded REIT as a long‑term, illiquid allocation. (Source: Investopedia)
Tax considerations
– REITs generally pass through income to shareholders; most distributions are taxable to investors (character can include ordinary income, return of capital, and capital gains).
– Return of capital reduces cost basis and can create larger taxable gains on eventual disposition.
– Consult a tax advisor to understand specific tax reporting and implications for your situation. (Source: Investopedia)
Who should consider non‑traded REITs?
– Investors seeking higher yield from private real estate exposures and willing to accept illiquidity and complex fee structures.
– Investors with a long time horizon who can tolerate potential principal loss and limited transparency.
Not appropriate for those who need short‑term liquidity, have a low tolerance for fees/conflicts, or who cannot evaluate private offerings.
Due diligence checklist (practical)
1. Read the prospectus/offering documents thoroughly: fees, distribution policy, redemption policy, conflicts, and end‑of‑life timeline.
2. Review sponsor track record: experience, previous funds, realization history, and any regulatory or litigation history.
3. Understand the investment strategy and target property types and geographies.
4. Ask for historic or pro forma cash flow and sensitivity analyses (vacancy, rent growth, interest rates).
5. Inspect fee disclosures line‑by‑line and model net returns to investors after fees.
6. Check leverage policy: current and target loan‑to‑value (LTV) and interest rate exposure.
7. Confirm SEC registration and review periodic filings (quarterly/annual) and any ongoing valuation practices.
8. Examine stated exit strategy and timeline, and how distributions are funded.
9. Evaluate liquidity options: redemption programs, tender offers, secondary market availability and typical discounts.
10. Talk to an independent financial planner and tax advisor. (Source: Investopedia)
Practical steps to consider if you want to invest
1. Decide allocation: Limit exposure to a modest portion of liquid net worth (non‑traded REITs should be a small, intentional allocation).
2. Verify suitability: Ensure the investment’s suitability standards match your financial profile (some offerings require minimums or have investor suitability questions).
3. Obtain and review offering documents: Prospectus, private placement memorandum, subscription agreement, and investor presentations.
4. Run fee and net return scenarios: Project cash‑on‑cash yield and total return after all fees under several operating conditions.
5. Confirm liquidity plan: Understand how you could exit early, what fees apply, and expected timelines for a typical liquidity event.
6. Complete subscription and transfer funds only if comfortable with illiquidity and risks.
7. Keep records: Maintain copies of all offering documents, confirmations, and tax forms.
8. Monitor filings and reports: Review quarterly and annual reports, NAV updates, and sponsor communications.
9. Reassess periodically: At least annually, evaluate performance versus expectations and alternatives. (Source: Investopedia)
Managing your investment and exit planning
– Expect multi‑year timelines; plan household liquidity so you don’t need to sell the holding prematurely.
– Watch distribution coverage: compare distributions to reported operating cash flow and net income. Large shortfalls may indicate unsustainable payouts.
– Track NAV and valuation updates and any announcements about listing or disposition plans.
– When a liquidity event is announced, evaluate whether to accept cash, roll into a new vehicle, or take other options based on tax and financial goals.
– Consult advisors when a tender offer, listing, or mandatory liquidation is proposed to optimize tax outcomes. (Source: Investopedia)
Alternatives to non‑traded REITs
– Listed REITs (exchange‑traded): offer liquidity, transparent pricing, and lower entry costs but can be more volatile.
– Public non‑REIT real estate ETFs or mutual funds: liquid, diversified exposure to real estate securities.
– Private real estate funds or syndications: may offer similar private real estate exposure but with varying liquidity and fee structures.
– Direct property ownership or crowdfunding platforms: greater control but require more active management and operational knowledge.
Conclusion
Non‑traded REITs can be an effective way for individual investors to access private, income‑producing real estate with professional management and REIT tax attributes. However, they carry significant tradeoffs: illiquidity, high fees, valuation opacity, and distribution risk. Thorough due diligence, limited allocation, and professional advice are essential before investing.
Primary source
– Investopedia — “Non‑Traded REIT” (https://www.investopedia.com/terms/n/non-traded-reit.asp)
If you’d like, I can:
– Walk through a sample fee‑adjusted return calculation for a hypothetical non‑traded REIT, or
– Provide a one‑page due diligence checklist you can print and use when evaluating a specific offering. Which would you prefer?