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Traded vs. Non-Traded REITS

So, you’ve decided to invest in real estate. You’ve put in the time and have done your research and know that due to the instant diversification and stream of income from paying out almost all of their profits each year, a real estate investment trust or “REIT” may be the right investment for you.

Just when you thought all of your decisions were made, you find out that there are different types of REITs you may invest in. Ultimately, the decision comes down to your main goals and objectives. The guide below is intended to give you some of the information you need to decide which type of REIT is best for you.

Main Types of REITS

The three main types of REITs are i) private REITs, ii) public non-traded REITs, and iii) publicly traded REITs. Each type has distinct characteristics and its own set of pros and cons.  

Private REITs

Private REITs are not registered with the Securities and Exchange Commission (the “SEC”), and their shares are not listed on a public exchange such as the New York Stock Exchange (“NYSE”). This means their shares are not directly affected by stock market volatility. Typically, there is little to no public information released about private REITs so it is often difficult to obtain performance information unless you are invested in the Private REIT.

Private REITs are available for investment only by accredited investors, which on a high-level is those individuals who have either over $1 million in net worth, excluding their personal residence or have made at least $200,000 a year for the past two years. Because they are not regulated, the SEC wants to ensure that only experienced investors that have disposable income are investing in these types of vehicles.

Private REITs offered to retail investors often have a minimum investment amount of anywhere between $10,000 to $100,0000, and the upfront costs for Private REITs vary by company. If you want to pull out your funds before a liquidation event, it might be difficult as redemption programs vary by company and are often limited.

In Summary:

Pros

  • Not directly affected by stock market volatility
  • Upfront fees can be low
  • Focus on long term objectives

Cons

  • Only available for investment by accredited investors
  • High minimum investment
  • Not regulated by the SEC
  • Redemption programs are limited

Public Non-Traded REITs

Public non-traded REITs are required to file with the SEC. However, their shares are not traded on a national stock exchange such as the NYSE. Which, much like private REITs, means their shares are not directly subject to stock market volatility. Though these REITs are not traded on an exchange, because they are registered with the SEC, there are required SEC filings and performance reporting is publicly available.

Public non-traded REITs are available for investment by anyone whether accredited or non-accredited, subject to certain investment limits. The minimum investment for a public non-traded REIT typically starts around $1,000 but may vary.

Many non-traded REITs charge high upfront fees that may be as much as 15% of the per share price according to FINRA. However, in the past few years, we have seen technology savvy non-traded REITS are working to redefine the industry by charging lower upfront fees. Our own REITs, MogulREIT I, LLC and MogulREIT II, Inc. charge a maximum of 3% as an upfront fee to our investors.

Because these types of REITs are not dealing with daily price changes like publicly traded REITs, the managers are able to focus on long term investments and investment objectives instead of focusing over daily price changes and quarterly earnings. In general, due to the long-term nature of the real estate market and the work involved in closing each transaction, the objective of many real estate managers and investors is to hold to the real estate investments for the long term.   

Like Private REITs, because the shares of non-traded REITs are not traded on an exchange, redemption programs are often limited and vary by company.

In Summary:

Pros

  • Not directly affected by stock market volatility
  • Upfront fees may be low depending on the REIT
  • Available to anyone who wants to invest, subject to certain limits
  • Regulated by the SEC
  • Low investment minimums
  • Focus on long term investment objectives

Cons

  • Upfront fees may be high depending on the REIT
  • Redemption programs are limited

Publicly Traded REITs

In contrast to both private REITs and public non-traded REITs, publicly traded REITs are listed on a stock exchange and as such are subject to the volatility of the stock market. As they are registered with the SEC and regulated, a wide range of public information is available both by the company itself and independent sources.

Anyone may invest in publicly traded REITs with a minimum investment of one share (at the current share price). The upfront fees charged are charged by the broker that you purchase your shares though and may be the same as you would pay for buying or selling any other publicly traded stock.

Because publicly traded REITs are liquid, visible to the public, and have daily pricing changes, there may be pressure to focus on short term quarterly earnings instead of long term investment objectives. It may also be hard to raise capital when the market is down.

Unlike private REITs and public non-traded REITs, publicly traded REITs are liquid and may be traded every business day, which means they are easy to redeem.

 In Summary:

Pros

  • Liquid investment
  • Upfront fees are low
  • Available to anyone who wants to invest
  • Regulated by the SEC
  • Low investment minimums

Cons

  • Directly affected by stock market volatility
  • Redemption programs are limited
  • There may be pressure to focus on short term quarterly earnings instead of long term objectives
  • Hard to raise capital when the market is down.

Summary

Overall, which vehicle you choose to make your REIT investment in real estate is dependent upon what your current goals and objectives are, among other variables. Some of the questions you should ask yourself before choosing what type of REIT investment to make are: What is important to you? Are you looking for a more liquid investment like a publicly traded REIT? If so, are you comfortable with daily price fluctuation and market volatility exposure? Or is your goal to invest real estate as directly as possible?  While non-traded REITs were often shunned due to their high fees, many companies, including RealtyMogul.com, have made it possible to charge the investors lower up-front fees and put more of your money to work for you.

Learn more about RealtyMogul’s Growth REIT and Income REIT today.

 

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