Non-Listed REIT's


Non-traded REIT's

Real Estate Investment Trusts

Private Real Estate Investment Trusts

Private Placement Investments

Private Placement Memorandums

Offering Memorandums

Confidential Offerings

Confidential Offering Memorandums

Confidential Information Memorandums

"Real Estate Secured Funds"

Crowd Funding


71% of non-traded REIT's under performed their benchmarks


Non-traded REIT's under performed comparable publicly traded REIT's by about 1.4 percent per year during a 21 year period ending in 2011


"We believe listed REITs to be the most appropriate option, from the standpoint of both the alignment of shareholder interests, and long-term risk/return potential". -- Morningstar


"No way. Never ever. I consider non-traded REITS to be a cesspool. If anyone ever tried to sell me a non-traded REIT I would cross them off my list. Nobody goes out looking for these non-traded REITS. These things are sold" -- Bob Brinker




Any investment that pays a higher dividend rate than high yielding index funds like DVY is almost certainly riskier than normal investments like a balanced bond / stock index fund like VBINX. According to the SEC, rarely does an investment provide higher returns and low risk. Non-listed REIT's are no different. Avoid like the plague because non-traded REIT's violate rule #1 and rule #4.


Brokers typically earn obscene 8 to 10% commissions when they can convince their clients to invest in non-listed REIT's. This is a major conflict of interest, not to mention that this reduces the amount available to invest (and generate returns). The investor usually pays a sales "load" of about 12% but may be as high as 15%. The managers who run the REIT also typically skim off 2% in management fees per year.


Note that some real estate investments are sold through "crowd funding". Crowd funding is used when banks are not interested in financing the business venture. That alone should tell you something about the risk of the investment.


HIGH, OFTEN UNNECESSARY AND HIDDEN COSTS: One of the core problems with non-listed REIT's is the lack of price transparency. Investors are unaware that their broker's commission is being subtracted from their investment value. The trusts that offer these investments are deceptive about letting you know that they subtract your broker's commission from your share purchase price. Yet on your first statement it is likely to either say "price not available" or it just won't reflect the value after subtracting your broker's hefty commission. Fortunately FINRA has changed this rule but it will not take effect until January of 2016. Therefore investors will continue to be deceived.


FAIR PRICE OR NOT? Another problem with non-listed REIT's is the simple question of how do you know what shares of real estate are worth? With real estate, in the absence of an actual independent appraisal, you don't know what it's worth. And ultimately it isn't until you sell real estate property that you know what it's really worth.


"... the market price of a non-traded REIT does not reflect the underlying value of the REIT's holdings nor the potential for future dividend payments. In a free and efficient market, an asset's price fluctuates with investors' expectations for the changes in the asset's future value. In equity market, the share price carries information about investor's beliefs about future dividends and value growth, including expectations regarding the ability of that firm to sustain its business model. The prices of non-traded REITs do not reflect this information because they are not openly traded - prices are set at the discretion of management, and can be highly misleading as they can be unrelated to the value of the REIT or its holdings. A more accurate measure of a non-traded REIT's value would be the net asset value of its holdings." -- Securities Litigation and Consulting Group article


Non-listed real estate investments do not live in an alternate universe of investment returns


With real estate there are two basic components that contribute to return on investment. We have the value of the property which goes up or down, and the property generates rental income. You invest a certain dollar amount and eventually you get out a certain dollar amount. The forces of supply and demand determine these returns. When it comes to these basic market forces, never let anyone suggest to you that non-traded REITS (private placements, etc) have some sort of advantage over publicly traded REITS simply because non-listed REITS are not traded on the stock market.


LACK OF SHARE PRICE VOLATILITY IS A MISDIRECTION:You can’t measure the volatility of these investments because they do not trade” says Joseph Harvey of Cohen & Steers, one of the biggest REIT investors in the world. Just because a non-listed REIT's price does not fluctuate on a stock exchange doesn't make it's net asset value immune to economic changes.


Furthermore non-listed REIT managers are judge and jury with regard to the share price of a non-listed REIT. It usually isn't until a liquidity event takes place (such as winding down of the operation and sale of property) that you find out what a non-listed REIT (and share price) is actually worth. As they say, it isn't until the tide goes out that you find out who's been swimming naked.


THEY'RE MORE RISKY! Non-listed REIT's are also much riskier than "advertised" by the brokers who all too often sell them to senior citizens who think that they are similar to and as safe as or safer than bonds. Here's an all too common story about a REIT that dropped 25% in value in one day.


Rich Uncles BRIX REIT lost 93.6% as a result of coronavirus.


In cases involving fraud the investment trust managers may borrow money against investment property assets in order to pay investors their promised income payments. Because non-listed REIT's are loosely regulated private equity investments, investors may never find out until it's way too late. In the case of one of the largest non-traded REIT's called Behringer Harvard REIT I, investors saw their final share values drop a whopping 53%.


"NOT TIED TO THE STOCK MARKET" REALLY? Non-listed REIT's are often solicited under the headline of "not tied to stock market risk". But just because real estate isn't sold on the stock market doesn't mean that it isn't affected by the stock market. Both are tied to the economy. When stocks go down, people have less money to spend on real estate, then real estate prices decline. Also the fact that non-listed REIT's are not publicly traded is the problem -- not the selling point! When an investment is not publicly traded you can never know if you are buying or selling at a fair market value price. The only thing you know for sure is that it is not as highly regulated as a stock market traded security.


QUESTIONING THE APPROPRIATENESS: Non-listed REIT's may sometimes be sold to investors with little regard for the wise old phrase "Don't put too many eggs in one basket". Unfortunately these products may be sold to investors with limited liquid net wort. Or sometimes they are sold to investors who are already invested in real estate.


DIVERSIFICATION: Non-listed REIT's are usually sold to investors who are ignorant of how diversification into bonds smooths out volatility. When Mr. Broker starts talking about the stock market crash of 2008 he is harnessing your ignorance of diversification in order to make the big non-listed REIT sale.


ALL OF YOUR EGGS IN ONE BASKET: When you invest in a single real estate stock or a single non-listed REIT you are putting all of that money in one company, which increases your risk. A better choice would be to invest in a real estate index fund.


If you reall want to take more risk then consider a publicly traded company REIT.


SOLD ON THE STOCK MARKET? Beware of solicitations that might lead you into thinking that a non-listed REIT is somehow publicly traded on the stock exchange. Don't be fooled by descriptors like "publicly, non-listed REIT which requires governmental permitting and audited financial statements". The operative words are "non-listed", meaning that it is not traded on a stock exchange. Also don't be confused into thinking that it's a publicly traded company simply because they offer you shares of stock. The test is whether it has a ticker symbol that can be researched on Yahoo Finance.


NOT AUDITED BY THE SEC: Non-Traded REITS are not audited by the Securities and Exchange Commission. Some REITS claim to be audited but don't define what "audited" means. It could just be a superficial auditing. This leaves open the possibility for fraud.


INSTITUTIONAL INVESTORS WERE NOT INTERESTED: The fact that a real estate investment "opportunity" is being solicited to the general public is itself a red flag. Good investments are quickly snapped up by institutional investors. Managers of good investments don't need to be bothered with the hassles of pushing them on the general public.


OVER-TAXED - Non-listed REIT's are taxed as ordinary income (like annuities and other retirement accounts) unless they are considered to be qualified dividends, which are taxed as capital gains. Once you look at this chart then alone this should be a deal breaker!


LENGTHY PROSPECTUSES THAT ONLY A LAWYER CAN UNDERSTAND: Never invest in private equity without the help of a lawyer. I've encountered REIT's with 134 page prospectuses jammed full of legal language, which of course only a lawyer can decipher (and charge you for several hours of reading). Even the shorter prospectuses will have a mind boggling 50 or so pages of legal hieroglyphics. Since lawyers charge upwards of $500 an hour, this should be be a deal breaker for average Joe investors. Unfortunately the vast majority of investors never hire a lawyer, let alone a fiduciary registered investment adviser.


POTENTIAL ARTIFICIAL YIELDS: The high 8%, 9%, 10% or more dividend rate that they advertise can sometimes be like smoke and mirrors to one degree or another. Sometimes those high interest payment rates get reduced or drastically reduced. Non-traded REIT's are notorious for broken promises. Perhaps this is not surprising when you understand that a non-traded REIT usually operates sort of like a Ponzi scheme (not an actual Ponzi scheme). The trust is usually allowed to use investment money to pay dividends to investors. That's not revenue. That's artificial revenue! When this happens the investment becomes less efficient because less money is working to generate returns. To find out if they have the right to do this look in the prospectus. Here are some examples of what the language might look like:


"We may fund distributions from borrowings"


"Dividends may not always be paid from earnings"


"We may use proceeds of the stock offering to fund distributions to shareholders"


"We may use other sources to fund distributions"


"If we need additional capital we will have to obtain financing from other sources such as from borrowings or future offerings."


NOTE: Again for clarity, the right to use investment money to pay dividends to investors in and of itself does not mean that it is a Ponzi scheme. If and when investment money is used to pay dividends, the investment inherently becomes less efficient. Using investment money to pay dividends represents money that is not available to invest (and generate returns). It's a simple returning of capital to investors at a zero return on investment.


SUSPENDING THEIR REDEMPTION POLICY: Non-traded REIT's are famous for initially claiming that their investment offering is liquid. They entice you with a "redemption policy". They'll say that you can sell it at any time. The problem is that often times they change the rules of the game in the middle of the game. They'll suspend that redemption policy after you give them your money and it's too late.


Search the prospectus or private placement memorandum for the word "redemption" or "redeem". Even though you may have been sold on the idea that you can redeem your shares, chances are that you'll find some sort of language about the managers having the right to restrict or reject requests for getting your money back early. It is common sense that they are not going sell off property or impair their ability to run the business just because you want your money back. At the very least, they would need an excess of cash from revenues in order to pay you back.


Here's as example of what the language might look like:


"We may reject any redemption request at our sole discretion"


UFO = U FREAKIN' OWN IT: Non-listed REIT's are illiquid. Your money in stuck for typically 5 to 10 years in these low quality investments. Illiquidity is a big no no! If you need to get your money out early this can be difficult if not impossible because non-listed REIT's are just that -- not traded on the public market! If there is someone willing to buy out your shares on a site like ReitBid.com, they typically are only willing to pay 20% to 30% less than what you originally invested.


THE SAME MARKET CHALLENGES AS EVERYONE ELSE: Don't be fooled into believing that the managers of a non-listed REIT have some sort of advantage over other real estate investors when it comes to buying and renting property. Everyone faces the same market conditions and forces of supply and demand when it comes to making money with property.


FINITE ENTITIES THAT INHERENTLY HAVE ADDED COSTS: All non-traded REITs have three lifecycle stages: capital raise and acquire property (acquisition), management, and then disposition (sale of property and winding down of the operation). This dispositional stage is an added cost that includes such things as broker commissions (upward of 6% of the cost of property sold) and advisor fees. Publicly listed REITs are more often ongoing operations that do not have this costly dispositional stage.


PIE IN THE SKY PROMISES: The promised returns on these investments are all too often unlikely. A professor at the University of Texas studied 17 non-traded REITs. He determined that they under performed comparable publicly traded REIT's by about 1.4 percent per year during a 21 year period ending in 2011.


BIG BROKERAGE FIRMS refuse to sell non-listed REIT's because of all of the flaws. Those include Merrill Lynch, Morgan Stanley Smith Barney, CITI and others. It's the little guys who are looking for a quick buck and who are selling these products. Often it's the little guys who are under-insured and/ or not overly concerned about getting sued for selling unsuitable investments because they don't have much to lose.


PROOF IS IN THE PUDDING: In 2012 Blue Vault Partners LLC and The University of Texas at Austin McCombs School of Business conducted a study and determined that 71% of non-traded REIT's under performed their benchmarks.


OVERLY AMBITIOUS EARNINGS PROJECTIONS: In trying to lure investors, REIT promoters may project too-good-to-be-true returns even though they rent to tenants with very good credit. In reality you have to take more risk to get these higher returns. That means renting to less creditworthy tenants.


LEVERAGING = AMPLIFYING RISK: These non-listed REITS typically borrow money from the bank in order to fund their projects. This increases opportunity for higher returns, while at the same time increases risk to the downside. Find out the loan-to-cost ratio (“LTC”) of the REIT you are considering investing in. An LTC of 60% would mean that 60% of the cost of acquisition and construction of the property is funded with bank borrowed money. That would mean that if the property value dropped 40%, then the value of the investor's underlying principal investment would be not 60%, but zero. If the property value dropped just 20%, then the value of the investort's principal would be not 80%, but only 50%. Amplified risk.


BLIND POOL STRUCTURE: Non-listed REITS raise money before buying and/or identifying investments. This can make it difficult for investors to evaluate the investment they are getting into. To some degree they're making a stab in the dark. This compares with publicly traded REITs which already have existing business models, assets and balance sheets.


HIGH 7% - 9% YIELDS PUT UNDUE STRESS ON REIT: Non-listed REITS typically pay really high dividend yields of 7% or more. To the unsophisticated investor this may sound great. But wait! REITs start paying these high dividends before the entity has even gotten out of the gates! Managers must raise capital and acquire property and tenants before they can generate revenue. Otherwise you are simply using original investor principal to pay out dividends which is not an efficient investment. It puts a drag on the returns of the investment.


FFO / DIVIDEND PAYOUT RATIO: Publicly listed REITs on the whole have a more efficient funds from operations / dividend payout ratio, which is typically around 70%. This means that they are earning enough revenue to continue paying dividends and they are financially stable enough to cushion against things like economic downturn. The average non-traded REIT has an FFO / dividend payout ratio of 110% to 140%. This often results in dividend reductions.


INFERIOR RISK MANAGEMENT? High dividends of 7%, 8% or 9% might seem like a good thing to a novice investor, but this actually puts pressure on the people running a non-listed REIT to hurry up and invest the blind pool money regardless of market conditions, market cycles, etc. The best decision making is not always done quickly. The best investments are not always found quickly.


HIGH PRICE PAID FOR THE ADVISOR: A high price is typically paid to acquire a REIT advisor. Adding salt to the wound, that high priced adviser is sometimes marketed as a positive for shareholders.


LACK OF TRANSPARENCY: Non-listed REITs are not as transparent as publicly traded REITs. Non-traded REITs rarely disclose more than is required by the SEC.


TRIPLE NET LEASES: With a triple net lease, the landlord receives the rent plus the net of all expenses, and it's usually the most credit worthy tenants who are the renters. Promoters of non-traded REITS tout triple net leases as a big positive to investors. However these investments could be ticking time bombs. If interest rates go up, REIT share prices will go down and those high dividend rates will become unsustainable.


AN INDEX FUND IS A MUCH BETTER CHOICE: If you really love real estate that much then save yourself the risk, the lack of transparency, the headache of hiring a lawyer and fiduciary adviser to review the non-listed REIT prospectus and contract, and having to lock your money in prison for many years. Just buy an ETF like RWR or VNQ through any deep discount brokerage like Charles Schwab for less than ten bucks.


IS IT EVEN NECESSARY TO INVEST IN REAL ESTATE AT ALL? Respected economist Burton G. Malkiel says that you should instead invest in high dividend paying stocks as a replacement for real estate because of the tax advantages. Article


IS REAL ESTATE REALLY LESS RISKY THAN STOCKS? No. Some people have it wired into their brain that real estate is low risk. During a 20-year period ending in 2014, the REIT total return index was more volatile than large cap stocks, commodities, international stocks and small / mid cap stocks.


AVOID GETTING IN AT MARKET TOPS: If you are hell bent on investing in a non-listed REIT then the best time to be acquiring property is after a market decline, when prices are lower and cap rates are high. This gives the REIT its best chance at being able to pay out the high yield and to return investor original principal.




Investment News story: 5 years later investors are suddenly told that their shares of the Strategic Realty Trust have dropped 30%. Keep in mind that 5 years ago the real estate market had hit rock bottom. Real estate in general has shot up! Shares were sold by none other than independent broker dealers (non-fiduciaries who don't legally work for you).


Aug 15, 2012 - Eight of the largest non traded real estate investment trusts have lost $11.3 billion, or 37% of their equity value, over the past seven years, according to an analysis conducted on behalf of InvestmentNews.


Forbes Article: Non-traded REIT's are an unnecessary niche.


REITAttorneys.com article about numerous non-traded REIT investor disasters.


Wall Street Journal article: Formerly popular non-traded REITs fall on hard times. All too often investors can't get their money back. "It was a rotten investment"


Here's another story about a brokerage firm that was fined millions for violations involving non-traded REITs. Performance results were exaggerated, and the investment was sold to investors without establishing whether the investments were suitable to them. As previously discussed, the "suitability standard" is a joke anyway. Fiduciary advisers will not sell non-traded REIT's.


Another story tells about how 5 brokerage firms broke the law in order to sell REIT's for their own interests (high commissions) - The state of Massachusetts understands that REIT's are risky and so they have a rule that says that REIT's can represent no more than 10% of an investor's liquid net worth. But that law didn't stop 5 firms from violating that state law.


Another story about executives being charged with inflating non-traded REIT financial results.


NEXT ARTICLE: Mutual fund fleecing


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