Trying to work out where a non-traded REIT sits between a public REIT and buying a house

Question

I'm sorting through which parts of this industry I might actually want to be in, and non-traded REITs keep coming up as the passive option. What I don't understand is what I'm actually getting that's different. A public REIT I can buy on my phone for the price of one share. A rental house I can walk through. This thing is somewhere in between and someone told me it's basically a public REIT with the volatility removed, which sounds like getting something for nothing, so I assume I'm missing what I give up.

Rena Guide · Accepted Answer

The volatility isn't removed, it's just not being printed every day. A non-traded REIT owns the same kind of buildings a public REIT owns, and if office values drop 20%, the value of those buildings dropped 20% whether or not anyone quotes a share price. What changes is the mechanism for setting the price. A public REIT's price comes from buyers and sellers trading all day, so it moves with market mood as well as with property values. A non-traded REIT's price comes from appraisals on a set schedule, usually monthly or quarterly, so it moves in smaller steps and lags.

So what you're buying isn't stability of value. It's stability of the reported number, plus insulation from the moments when public markets punish an entire sector regardless of what individual buildings are doing.

And @arbor named the cost. Your exit runs through the sponsor's share repurchase program, which is typically capped and can be suspended.

Two terms to keep straight, because people use them loosely. Public non-traded REITs register with the SEC, publish audited financials, and are generally open to any investor, often with minimums around $2,500. Private non-traded REITs are exempt from registration, restricted to investors who meet income or net worth tests, and require a lot more diligence on your part because there's less mandated disclosure. People say "private REIT" for both. They're different products with different protections, and it's worth knowing which one a given offering actually is before you read another page of it.

diane_kowalski · Answer

You give up the ability to sell. That's the whole trade. A public REIT you can exit at 10am on a Tuesday at whatever price the market says. A non-traded one you exit through the sponsor's repurchase program, if it's open, on their schedule, at their stated NAV.

nicole_adeyemi · Answer

The appraisal lag cuts both ways and nobody selling these mentions the second direction. If values are rising, your NAV is also behind, and if you redeem you redeem at the stale lower number. Smoothing isn't a gift.

paulgrant17 · Answer

@plumb the thing that made it click for me was fees. Public REIT through a brokerage, my cost is basically zero plus the fund's expense ratio if it's an ETF. Non-traded, there can be selling commissions, dealer manager fees, ongoing advisory and servicing fees, and the sponsor's asset management fee. Those come out before your distribution. I don't have the numbers memorized but the fee section of the prospectus was much longer than I expected and it's the first thing I'd read now.

Trying to work out where a non-traded REIT sits between a public REIT and buying a house

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