Some investors value real estate as an asset class. One of the positives of the use of real estate is that it is not highly correlated to the stock market and can be used as the source of diversification inside of a portfolio.
Other investors prefer physical properties as a way to invest in the real estate asset class. Using a single property to invest in the real estate asset class does have some drawbacks, which include being concentrated in a single property or geographic location in addition to the ongoing maintenance and management responsibilities.
One type of investment that seeks to take advantage of real estate as an asset class but minimize the disadvantages of single property risk concentration and management hassles is a Real Estate Investment Trust or REIT for short.
A REIT is an investment in a portfolio of real estate properties professionally managed by a third-party. Shares in a REIT allow for part ownership of the underlying properties and a portion of the rental income received through a dividend.
In this article I will discuss the non publicly traded REIT option versus the publicly traded REIT. Non Publicly traded REIT shares are not bought and sold on the secondary market and have limited liquidity. The tradeoff of using a non publicly traded REITs share is that the share price does not fluctuate each day as does its publicly traded counterpart.
What are some of the advantages of purchasing shares in a non publicly traded REIT?
One advantage of the REIT structure is professional management of the underlying properties. The investor does not have to do the due diligence on which properties to buy. The investor is not responsible for maintenance or repairs on the properties. The investor is not responsible for maintaining occupancy of the underlying lease spaces. In essence the investors sole responsibility is due diligence on which REIT company to purchase.
Another advantage of the REIT structure is that each share purchased provides a level of diversification. Purchasing shares of a multifamily apartment REIT would allow the owner to maintain partial ownership in dozens of multi family apartment units which could be located in multiple geographic areas. This allows for diversification beyond choosing a single rental property. Multiple REITs can be purchased in order to increase diversification such as healthcare REITs, hotel REITs, self storage REITs, grocery store anchored REITs, etc.
As with any investment, there are trade-offs.
As mentioned earlier the non publicly traded REIT share is not fully liquid to buy and sell at will. Shares of a REIT may not be available to be sold for a number of years after purchase without incurring a penalty. Therefore it is important to understand that non publicly traded REIT investments are used primarily for long-term consistent income.
The share price and the dividend received in a REIT are not guaranteed. The share price of the non publicly traded REIT can fluctuate up or down each year and the dividend received may go up or down depending on many factors.
It is important to utilize REIT companies that have a long track record of successful REIT cycles.
Because of the nature of the risk of non publicly traded REITs, I suggest that no more than 20% of a client’s portfolio be allocated to them and that no more than 5% of the client’s portfolio be allocated to any individual REIT company.
If you have any questions about non publicly traded REITs, please contact me.