“Performance aside, it costs 8% or more in upfront commissions to buy the typical nontraded REIT. By contrast, you can buy an index fund of public REITs at no commission and with annual fees as low as 0.1%.”
Protecting Your Bucket, Jason Zweig, Wall Street Journal, September 14, 2012
One of our recent articles discussed the dangers of non-traded REITS, or Real Estate Investment Trusts, which are high-commission investments that don’t trade on exchanges and only update their values ever 12 months or so.
Investors should tread warily where non-traded REITs are concerned.
The so-called market “values” are set by the investment promoters and may not be accurate. Wall Street Journal author Zweig says roughly half of all non-traded REITs have cut dividends or their reported values since the real estate slump.
These non-traded REITs can pay deceptively high yields, which may not be sustainable. Much of the income payout may not stem from earnings, but “may come from borrowed money or out of the investors’ original capital,” says Zweig.
Here’s the best advice for non-traded REITs: don’t buy them. Research by Jay Hartzell, a finance professor at the University of Texas in Austin shows nontraded REITs underperformed a comparable sample of publicly traded REITs (the kind that we buy for client accounts).
Financial Tip: It’s easy to add exposure to real estate assets in your portfolio by using inexpensive, no-commission mutual funds and exchange traded funds. There’s no reason to pay absurd commissions or tie up your money in an illiquid investment when better and cheaper alternatives are available.