Non-Traded Real Estate Investment Trusts

Non-Traded Real Estate Investment Trusts

The desire to invest in real estate is something shared by a lot of people looking to turn their money into more money. Real estate appears enticing to investors because it provides them with something tangible that they can see and touch. This is in contrast to purchasing equities through public securities exchanges, which provide investors with a more abstract version of ownership.

The equities market can be very complex and often creates this idea that purchasing real estate is a safer investment. Individuals believe that the physical land purchased will always be a beneficial commodity to them, no matter what it is being used for. The idea that real estate can be safer and more lucrative than publicly traded equities is unfortunately a common misconception and has led to unsuspecting investors being placed in highly unsuitable investments known as non-traded real estate investment trusts, or REITs.

What Are Non-Traded Real Estate Investment Trusts?

Non-traded REITs are investment pools designed to earn investors income through the purchase of real estate. Most often, these investment pools fund development projects which generate income through rent being paid.

Non-traded REITs are not traded on any public securities exchanges, but rather are offered privately to investors until enough capital is raised to begin or continue operations. Because these products do not trade publicly, it is very hard for securities firms and regulatory agencies to monitor them. This makes it a lot easier for securities brokers to misrepresent these investments as safe and lucrative. This is done even though nothing could actually be further from the truth.

The Truth About Non-Traded REITs

The truth is that non-traded REITs are risky and illiquid securities that can be highly unsuitable for investors. Stock brokers often pitch these products to investors with a great deal of excitement and urgency. This is done in attempt to make investors believe they are about to miss out on something life-changing.

However, the speculative nature of non-traded REITs often goes either misrepresented—or undisclosed entirely—when pitching to potential investors. There is no guarantee that a non-traded REIT’s development projects will be successful because these funds are not fortune 500 companies with a history of successful projects. Instead, they are private investment pools subject to high fees and internal conflicts of interest that make it very difficult to profit from.

Distributions and Non-Traded REITs

Brokers also use the promise of high income distributions as another selling point. Many brokers often “promise” investors they will see their investment returns through distributions paid to them over the life of the investment. However, many investors buy into non-traded REITs without fully understanding that these distributions are in no way guaranteed. These distributions are entirely dependent upon how successful the fund is doing.

Many non-traded REITs attempt to keep early investors happy through consistent distributions paid for by borrowed money or money brought in through new investors. Non-traded REITs are similar to Ponzi schemes in that regard.

Non-Traded REITs are Incredibly Illiquid

Publicly traded securities are accompanied by the logistics of a free market in which to redeem investments. This means that investors can exchange their shares and receive an amount of cash equal to what their shares are currently valued. This is not the case with non-traded REITs.

Those who manage these companies want to maintain operating capital for as long as they can. Because of this, they work greatly to deter investors from withdrawing early. Investors looking to withdraw from a non-traded REIT are usually only offered buyouts on a quarterly basis with a limited amount of buyouts offered each quarter. If the amount of investors looking to withdraw exceeds the amount of buyouts offered, there could be a lot of investors stuck in an investment they don’t want to be in.

On top of this, the amount these REITs’ managers offer to these individuals is often considerably less than what investors are told their shares are presently valued at. Non-traded REITs can often only operate for a finite amount of time until it either becomes publicly traded or its assets are liquidated. It is at that point in time that an investor can liquidate their assets for what they are told the shares are valued at; however, depending on how successful the company was, the shares may actually be completely worthless at that point.

Brokers Take Advantage of Investors By Recommending Risky Non-Traded REITs

Non-traded REITs are incredibly harmful to investors for many reasons. Despite this, they continue to be recommended by over-zealous brokers who receive excessively high commissions for recommending these products.

Broker commissions for non-traded REITs can be as high as ten percent of the investor’s principal investment. When an investor’s principal investment is lowered by that much, it makes it almost impossible for them to see long-term positive returns. These commissions create a very obvious conflict of interest when brokers recommend products that they know—or should know— are highly unsuitable for investors. These commissions, in addition to other up-front fees when purchasing these products, are just another reason these products are so unsuitable for investors.

Securities brokers like to take advantage of the complex nature of non-traded REITs and the fact that investors like the idea of investing in real estate. If it weren’t for these less than scrupulous brokers, investors might stand a better chance of learning the true nature of non-traded REITs. That they are risky, deceptive, and illiquid investments that are unsuitable for investors—especially those with higher liquidity needs and more conservative investment objectives.

If You Suffered Losses Due to a Non-Traded REIT – Contact Oakes & Fosher

Non-Traded Real Estate Investment Trusts Attorney, Bruce Oakes

Oakes & Fosher dedicates its entire legal practice to helping investors across the nation. If you believe that your securities broker placed you in a highly unsuitable Non-Traded REIT, you may be entitled to damages. Contact our securities fraud attorneys at Oakes & Fosher for a free and private consultation. Since 2007, we’ve won more cases on behalf of individual investors tried before full FINRA panels than any other attorney in the country.