Are you doing well with your investments? Or are you unaware of the constraints that make other investments unsuitable for investors?
In one of our previous articles “Why Invest in Direct Real Estate?”, We told you that there are numerous advantages to investing in real estate. They include historical returns of over 9.2%, minimal volatility, income, portfolio diversification, and inflation protection.
So, why bother with a direct real estate portfolio when you can invest in a REIT – Real Estate Investment Trust? Let’s talk more about REITs.
What is a REIT – Real Estate Investment Trust?
A firm that owns and often operates income-producing real estate or associated assets is called a REIT.
REITs, similar to mutual funds, aggregate the capital of multiple investors. Individual investors can now earn dividends from real estate investments without personally owning, managing, or financing any properties.
One drawback of direct real estate is its lack of liquidity. Fortunately, this restriction does not apply to publicly-traded REITs, which is a substantial advantage if you have an emergency and require funds rapidly.
What could go wrong with a REIT?
There are three sorts of REITs, each with its own set of constraints when compared to direct real estate investing.
- Investing in certain institutional private REITs is similar to courting your favorite artists. However, there are things you wish to know before acting. Private REITs are not publicly traded and are not listed on a stock exchange.
- Nonlisted REITs from the past had high fees, a track record of exceedingly poor performance, and FINRA warnings concerning Ponzi schemes that resulted in “zombie REITs.” It should be known that these issues have been dealt with in the newer batch around 2017.
- Public traded REITs may have a place in your real estate portfolio. However, due to significant constraints, they are hardly ever an ideal core investment.
Let’s discuss them intensely one by one.
The star you’ll never date: Institutional Private REITs
Private REITs are not publicly traded and are not on a stock exchange. Many naïve investors and advisors associate them with nonlisted REITs, which are entirely different.
The top private REITs have assets of dollars. Because of their tremendous economies of scale, their management costs are incredibly inexpensive (for an investment requiring such active management): often below 1%. They do not charge load or broker fees.
Also, the best private REITs don’t simply strive to replicate their benchmark index (NPI or NFI-ODCE) because they comprise the index.
With its perfect trifecta of low expenses, economies of scale, and world-class managers, a private REIT is the real estate equivalent of investing in a mutual fund. Unfortunately, your chances of being accepted by your favorite star are slim. Most will not accept funds from individuals and will only work with multibillion-dollar institutions and pension funds.
The minority who will do so will demand a minimum investment of $5 million. As a result, they are out of reach for the vast majority of accredited investors.
Non-listed REITs from the past: a broker’s dream – an investor’s nightmare
Nonlisted REITs (also known as nontraded REITs) are nonpublic and not traded on the stock exchange. They are noted for excessive expenses (annual fees, loan fees, broker fees) and poor returns, as opposed to private REITs.
Fees for the initial consultation might be as high as 15%. Brokers can charge up to 10%, but the annual management costs are also frequently excessive.
Because of the vast commissions, brokers suggested more than $20 billion of these to naïve clients between 2009 and 2013. Many nonlisted REITs enticed investors with higher rates than they could manage.
Unfortunately, many nonlisted REITs were warned by FINRA (the Financial Industry Regulatory Authority).
This is how Bernie Madoff’s Ponzi scheme worked. Nonlisted REITs are excellent moneymakers for both brokers and funds. They are, in my opinion, an utterly unsuitable investment for any investor who has other options.
Publicly listed REITs
Publicly traded REITs are openly traded on stock exchanges. As a result, you can withdraw and reinvest your funds at any moment. However, this liquidity comes at a cost: volatility, diversification loss, and a liquidity premium. As a result, public REITs can be beneficial but not a primary investment.
Before investing in a REIT, you should be aware of whether it is publicly traded and how this may influence the benefits and dangers to you.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.