Publicly Traded REITs vs. Non-Traded REITs: What’s the Difference?
As REITs gain in popularity, prospective investors should understand the relative pros and cons between these two investment vehicles.
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With the equity market as volatile as ever, investors are increasingly turning to alternative assets to generate cash flow. One investment vehicle, in particular, that’s drawing attention is real estate investment trusts, or REITs. Research by Nareit (opens in new tab) shows that investments in REITs have more than doubled over the past 10 years.
REITs come in many different forms, with varying criteria. However, many prospective investors might not understand the differences — and relative pros and cons — between publicly traded REITs and non-traded REITs. The latter category includes both publicly registered non-traded REITs and private REITs.
Liquidity vs. Illiquidity in REITs
Publicly traded REITs are probably the most well-known type. These products offer some exposure to the real estate market through companies that invest in physical real estate assets. Rather than investing in a physical property, investors buy publicly traded shares of a company on an exchange, where pricing is subject to market forces and volatility.
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This type of REIT is highly liquid and can offer investors a way into real estate even though traded REITs act more like equities. That said, publicly traded REITs fell about 25% in 2022 (opens in new tab) due to the combination of a high-interest-rate environment and investor fears. Now, in early 2023, with further interest rate increases likely on the horizon, publicly traded REITs may continue to suffer under volatile and uncertain market conditions.
The recent downturn in the equity market and accompanying decline of publicly traded REITs have opened the door for non-traded REITs to showcase their investment power. Unlike publicly traded REITs, which are susceptible to market whims and Federal Reserve actions, non-traded REITs can be more insulated from stock market volatility.
While non-traded REITs are much less liquid since REIT management controls any redemption process, this potentially offers benefits as well — since REIT managers can remain focused on long-term strategy, and the process of holding periods and suspending redemptions gives the manager more flexibility in executing the strategy without having to reserve cash for redemptions.
Transparency in REITs
Both publicly non-traded and traded REITs are registered with the SEC and file regular, publicly available reports. These help investors understand where their money is going and provide an additional level of transparency that is delivered every few months, depending on the REIT.
Because private REITs don’t have a regular reporting requirement, they’re only available to accredited investors — who are classified by the SEC as qualified to invest in unregistered securities based on satisfying one or more requirements regarding asset size, governance status, income, net worth or professional experience. While the reduced regulatory oversight can be considered a risk of private REITs, the frequently lower operating costs can be seen as a benefit to counter that risk.
Investor Accessibility of REITs
Accessibility can play a key role in which types of REITs an individual might pursue. Private REITs are not only limited to accredited investors but typically have the highest minimum investment amount compared to other REIT options, potentially ranging from $25,000 to $100,000. Both these factors make them accessible only to high-net-worth investors. Publicly registered non-traded REITs, meanwhile, are generally available to non-accredited investors and often have lower minimum investment requirements as well.
Retail investors typically gravitate to publicly traded REITs, since these are open to all and typically have either no investment minimum or at least the lowest entry point of the three types. Publicly traded REITs can also be found on investment apps like Robinhood (opens in new tab) or Fidelity (opens in new tab), while publicly non-traded and private REITs are generally purchased only through specialized brokers.
In conclusion, no matter how you want to incorporate real estate into your portfolio, both traded and non-traded REITs offer industry exposure. Non-traded REITs are less correlated to the traditional equity markets and can add stability to an investment portfolio (opens in new tab), particularly during inflationary and uncertain times. On the other hand, publicly traded REITs can give investors real estate exposure without locking down significant cash and still can offer liquidity and dividend potential.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab).
Edward Fernandez is President and Chief Executive Officer of 1031 Crowdfunding (opens in new tab). With three-year revenue growth of 482%, 1031 Crowdfunding received ranking No. 1348 among America’s Fastest-Growing Private Companies on the Inc. 5000 list. Mr. Fernandez holds FINRA Series 6, 7, 24, and 63 licenses and is a Forbes Business Council Member. He has over 20 years of inside and outside sales experience and is personally involved in raising over $800 million of equity from individual and institutional investors through private and public real estate offerings. He is highly skilled in the simplification of highly complex real estate strategies and sophisticated investments and is regularly featured on Forbes, Inc., and the TD Ameritrade Network.
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