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Real estate investment trusts (REITs) are some of the best investments. REITs are ideal for income-seekers because they typically offer higher yields and capital appreciation over time.
There are two main types of REITs: traded and non-traded. Learning the difference between these REITs before you start investing will help you make better investment choices.
Here is everything you need to know about non-traded REITs.
Non-Traded REIT Definition
This asset is ideal for leveling the playing field for investors who want to benefit from the income and wealth potential of commercial real estate.
Instead of buying a whole property, you can buy a small part of one.
How a Non-Traded REIT Works
REITs were created in the 1960s by the U.S. Congress to make investing more accessible to investors of all budgets. This successful model is now used for REITs in over 40 countries.
Non-traded REITs allow investors to reduce or eliminate tax while receiving a return on real estate investments. The overall structure of a non-traded REIT is that an individual investor will purchase their portion of the investment.
The investment period is outlined at the time of purchase, and at the end of that time, the investor must list it on a national exchange or liquidate the asset.
Examples of Non-Traded REITs
There are several types of non-traded REITs you can put your money toward. Some examples of non-traded REITs include office space, shopping centers, multi-family homes, hotels, and more.
These real estate options need multiple investors to get them started and keep them afloat until the business is making money.
Non-Traded REITs vs. Traded REITs
The main difference between non-traded REITs and traded REITs is that traded REITs are traded on a public stock exchange, such as the New York Stock Exchange.
Because of this, traded REITs are often called publicly traded REITs. Traded REITs are very liquid and have thousands of shares traded daily.
Non-traded REITs cost less and are not listed on public stock exchanges.
Benefits of Non-Traded REITs
There are several benefits to choosing to invest in non-traded REITs. The first is that your investment isn’t correlated to how it performs in the stock market.
This means that you will not constantly be on edge about stock market performance, which can be very stressful for investors. Investing in non-traded REITs helps to create a diverse portfolio and decreases your chance of significant losses.
You are much less likely to have your portfolio entirely wiped out if you incorporate some non-traded REITs alongside other investment opportunities.
Another benefit to non-traded REITs is they allow investors to invest in properties that would otherwise not be available through the stock market.
This can increase your investment revenue because you are not dealing with market volatility.
Disadvantage of Non-Traded REITs
While there are many benefits of non-traded REITs, there are also some disadvantages you should be aware of before investing your money. Distribution is only sometimes guaranteed for non-traded REITs.
Each company’s board of directors decides how and when distributions are paid, and the outcomes of that process are uncertain. Some investors prefer to avoid that kind of uncertainty.
These investments offer tax benefits, but tax consequences can also result from distributions of non-traded REITs. This is because they are taxed as ordinary income, and not at the tax rate for qualified dividends, and there is potential for capital gain rates to apply, which can be off-putting.
A major disadvantage of non-traded REITs is that at the end of the investment period, you are not guaranteed that the value you are due has increased substantially or at all.
Non-traded REITs also have much higher fees and interest rates than traded REITs. The front-end fees, which encompass selling and compensation costs, must be less than 10% of the total investment amount.
The final disadvantage is that redeeming your shares early can come at a price. Many companies will limit how many shares you can redeem at once or before a liquidation event.
If you do sell shares before a liquidation event, the purchase price tends to be far lower than at the liquidation event.
3 Best Non-Traded REITs to Invest in 2023
If you are interested in purchasing non-traded REITs, here are the three best ones to put your money toward in 2023.
The company has over 371,000 investors that can invest in various real estate options, such as houses, apartment complexes, industrial buildings and land ready to be built on.
It primarily focuses on residential properties, but does acquire some commercial properties too. If you’re looking to build your non-traded REIT portfolio, Fundrise is great for beginners.
It is easy to sign up, and easy to see what properties are available at any given time. It also outlines short-term and long-term investment opportunities for each property listing.
Fundrise acquires residential and commercial property throughout the United States, and currently has properties available in Texas, Nevada, Virginia, Florida, and California.
Fundrise is also a top non-traded REIT because it showcases customer returns for the last ten years.
RealtyMogul is a little newer than Fundrise and launched in 2012. This Los Angeles, California-based investment company is one of the top non-traded REITs to invest in for 2023.
RealtyMogul has approximately 250,000 investors throughout the United States, which will only continue to grow. You can browse the RealtyMogul website to see the current and past investment opportunities.
Like other non-traded REITs, RealtyMogul gives you the choice of investing in single-family homes, multi-family homes, apartment complexes and commercial real estate, such as industrial warehouses.
But most of its investment options are residential properties. RealtyMogul operates throughout the United States, with properties in North Carolina, Connecticut, California, Michigan, New York and more.
It is an ideal option for more experienced investors and for identifying longer-term projects.
To date, it has had over 400 investment opportunities on its platform, with more than $3 billion invested. Over the past seven years, Yieldstreet has delivered over $1.8 billion to its investors, which is impressive in under a decade.
On its website, you can find investment strategies for private and public non-traded REITs. Yieldstreet is a non-traded REIT platform for experienced investors and offers more options than just residential and commercial property investments.
Its property investment offerings are spread throughout the United States and include single homes and apartment complexes. Yieldstreet has a little bit of everything for you to choose from, including short and long-term investments.
It also offers investment advice but is a little more complex than our other top non-traded REIT options for 2023.
How to Invest in Non-Traded REITs
There are a few options for investing in non-traded REITs. Most people choose to work with a financial advisor or individual broker, but you can also use third-party investment sites, like Fundrise, RealtyMogul, and Yieldstreet, which make investing easier than ever.
Are Non-Traded REITs a Good Investment?
Compared to traded REITs, non-traded REITs have their fair share of risks. But are they suitable investments?
Non-traded REITs tend to carry higher fees, and there is a risk of your investment not appreciating in value. Purchasing online can reduce the fees if you want to invest in non-traded REITs.
Non-traded REITs can be a good investment if you want to diversify your real estate portfolio, or if you are new to investing and don’t have the millions of dollars required for other real estate investments.
If you know the risks, non-traded REITs could be a good investment for you.
Non-Traded REIT FAQ’s
Here are some of the most frequently asked questions about non-traded REITs.
How are non-traded REITs regulated?
Non-traded REITs are not on national securities exchanges, but they are still regulated by the Securities and Exchange Commission.
How do you sell a non-traded REIT?
You can sell non-traded REITs back to the REIT on secondary markets, limited partnerships and as alternative investments.
Whichever way you choose, you must follow all the requirements and restrictions for selling a non-traded REIT.
How are non-traded REITs managed?
Even though non-traded REITs are not listed on security exchanges, they are managed by them.