How much of a portfolio can sit in something with a repurchase window instead of a sell button?

Question

I want income without picking up a second job, which is how I ended up looking at public non-traded REITs. The registered ones with audited financials and a $2,500 minimum are within reach and the structure makes sense to me. What I can't work out is the size of the position.

One view says treat it like any long-term real estate allocation. You wouldn't blink at having most of your net worth in a rental house you can't sell in a week, so an illiquid REIT at 20 or 30 percent of an investment account isn't unusual. The income is the point, and the lockup is what you get paid for accepting.

The other view says illiquidity compounds. A rental house I can at least list, mortgage against, or sell to a neighbor. A non-traded REIT has one door and the sponsor controls how wide it opens, with quarterly repurchase often capped. That argues for keeping it small enough that being unable to exit for two years is annoying rather than a problem.

And there's a middle position I keep hearing, which is that the size should be set by how long the money can be left alone rather than by a percentage at all. If the horizon is genuinely ten years, the cap doesn't matter much. If there's any chance you need it in three, no percentage is safe.

Curious where people actually land, and whether anyone sizes this differently than they'd size an equivalent listed position.

ryanmck27 · Answer

The horizon framing is the one that survived contact with the offering documents for me. Percentages are a way of not answering the question. A ten percent position you need next spring is worse than a forty percent position you genuinely won't touch until 2036.

Where I'd push back on your rental comparison, Marlow, is that the borrowing option isn't symmetric. You can put a loan against a house you own. You generally can't borrow against non-traded REIT shares on any decent terms, because there's no market price for a lender to mark against and transfer is restricted. So the rental gives you two exits and this gives you one. That changed my sizing more than any percentage rule.

One more thing worth pulling out of the documents rather than the brochure. Repurchase plans usually have a cap stated as a share of net asset value per quarter, and they're typically subject to the board suspending or modifying them. Read the actual language on suspension, since that clause is the difference between a slow exit and no exit. Confirm the current terms in writing with the sponsor before you fund, and how much of your own picture belongs in an illiquid position is a conversation for someone licensed to see all of it.

How much of a portfolio can sit in something with a repurchase window instead of a sell button?

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