Should a beginner in a non-traded REIT default to cash distributions or automatic reinvestment?

Question

Anyone funding a first small position in a public non-traded REIT hits the same fork on the subscription form: take distributions in cash to a bank account, or reinvest them into more shares automatically. The case for cash is visibility. The money arrives, it is yours, and if the whole thing ever turns out to be a mistake you have at least taken some of it off the table without touching the repurchase program. It also keeps the investor honest about what the thing actually pays, because a reinvested distribution can hide a lot. The case for reinvesting is that a beginner with a salary usually does not need the income yet. Forty dollars a month in cash tends to go into groceries and leaves nothing to show for it in five years, whereas reinvested it compounds inside the vehicle already chosen. Some plans issue reinvested shares at a small discount to NAV as well, which is close to free money. The reason to hesitate on reinvesting is that every reinvested share is a newly bought share, and that matters for how long each share has been held if the investor ever wants out. That part deserves a closer look than most subscription forms invite. The boring version that works is the goal. Which one has held up for the people here, and why?

tashaford30 · Accepted Answer

The holding period point half remembered is the one that should decide it, so here it is properly. In most repurchase plans the price received depends partly on how long the specific shares being repurchased have been held, and shares held under a year are often repurchased at a reduced price. Reinvested shares are newly issued, so under a plan like that an investor ends up permanently holding a small, growing slice of shares that are the most expensive to sell. If a full repurchase request is ever submitted, the plan works out which shares are which, and the recent ones get treated as recent ones. That doesn't make reinvesting wrong. It makes it wrong for someone whose real plan is to test the vehicle for two years and maybe exit. For a genuine ten year hold, the drag is trivial and the discount on reinvested shares may well outweigh it. So the question isn't cash versus compounding. It's how confident someone is that they're staying. Read the plan's language on holding period and on the DRIP price, both are in the offering documents, and if they don't match what's described here, this analysis doesn't apply. Take cash for the reason @devon_pierce gives, or switch to reinvest once the second-guessing stops. The election can usually be changed later.

devon_pierce · Answer

Cash, every time, and the reason has nothing to do with math. When money shows up an investor finds out whether they believe in the position. Reinvestment lets you not look at it for four years.

laurenkim53 · Answer

40 a month into groceries is a real argument though. If it's going to evaporate, compounding it inside the fund is better than counting on discipline. Depends whether there's actually somewhere for the cash to land.

nataliehsu · Answer

@tashaford30 the switchability is the part I'd underline for @tylerbrooks9. It's an election, not a marriage. Confirm with the platform that you can change it and how long the change takes to take effect, since some process it on a monthly cycle.

priya_n21 · Answer

For income eventually, cash tends to be the natural default... But @tashaford30's framing is a good case for rethinking the first couple of years.

Should a beginner in a non-traded REIT default to cash distributions or automatic reinvestment?

5 replies