Investing in Real Estate Investment Trusts (REITs) can be an attractive option for those looking to diversify their portfolios and gain exposure to real estate markets. However, not all REITs are created equal. Non-traded REITs, in particular, pose unique risks that investors should be aware of. At Bakhtiari & Harrison, we have seen firsthand the challenges and losses faced by investors in these complex products. This blog aims to shed light on the inherent risks of non-traded REITs, using examples from problematic REITs such as Walton and BREIT, and to provide guidance on how to navigate these investments.
What Are Non-Traded REITs?
Non-traded REITs are real estate investment trusts that are not listed on any public exchange. Unlike publicly traded REITs, which offer liquidity and transparency, non-traded REITs are often illiquid, meaning investors cannot easily sell their shares. These REITs are typically sold through brokers and financial advisors, often marketed as stable, income-producing investments suitable for long-term investors.
The Illiquidity Problem
One of the most significant risks associated with non-traded REITs is their illiquidity. Since these REITs are not traded on public exchanges, there is no active market for their shares. Investors may find themselves locked into their investment for years, unable to sell their shares or access their capital. This illiquidity can be particularly problematic during economic downturns or if the investor needs to access funds for emergencies.
High Fees and Commissions
Non-traded REITs often come with high upfront fees and commissions, which can erode the overall return on investment. These fees are typically used to pay brokers and financial advisors for selling the product, rather than being invested in real estate assets. As a result, investors may see a significant portion of their initial investment diminished by these costs.
Valuation and Transparency Issues
Another challenge with non-traded REITs is the lack of transparency in their valuation. Unlike publicly traded REITs, which are subject to market pricing and regulatory oversight, non-traded REITs do not provide daily pricing information. This lack of transparency can make it difficult for investors to determine the true value of their investment and assess its performance over time.
Case Studies: Walton and BREIT
Several non-traded REITs have faced scrutiny and controversy due to their performance and management practices. For example, Walton, a non-traded REIT focused on land investments, has been criticized for its high fees and lack of liquidity, leading to significant losses for many investors.
BREIT (Blackstone Real Estate Income Trust) is another example. While it is managed by a reputable firm, investors have raised concerns about its liquidity and valuation practices. BREIT has implemented redemption limits, restricting investors’ ability to withdraw their funds, which has caused frustration and financial strain for some.
Other Problematic Non-Traded REITs
Beyond Walton and BREIT, other non-traded REITs have also posed risks to investors. Examples include:
- Inland American Real Estate Trust: Faced significant devaluation and liquidity issues, resulting in substantial losses for investors.
- Behringer Harvard REIT I: Struggled with poor performance and management controversies, leading to reduced investor returns.
- Cole Credit Property Trust: Encountered challenges with property valuations and liquidity, impacting investor confidence.
Protecting Your Investments
Given the risks associated with non-traded REITs, it is crucial for investors to conduct thorough due diligence before committing their capital. Here are some steps to consider:
- Understand the Fees: Be aware of the high upfront fees and commissions associated with non-traded REITs and how they impact your investment.
- Evaluate Liquidity: Consider the illiquidity of non-traded REITs and whether you can afford to lock up your funds for an extended period.
- Assess Transparency: Look for REITs that provide clear and transparent information about their valuation and performance.
- Seek Professional Advice: Consult with a financial advisor or legal expert to ensure you fully understand the risks and potential rewards of investing in non-traded REITs.
Conclusion
Non-traded REITs can be a risky investment, often fraught with high fees, illiquidity, and transparency issues. At Bakhtiari & Harrison, we are committed to helping investors navigate these complex products and protect their financial interests. If you have suffered losses from investing in non-traded REITs or have concerns about your investments, our experienced team is here to provide the guidance and support you need. Contact us today to learn more about how we can assist you.