Tired of Wild Market Swings? Discover The Advantages of Non-Traded REITs

Since the beginning of the year, markets have been more turbulent than normal with the S&P 500 being down 15.65%. But one sector can offer high yields and diversification in falling markets: non-traded real estate investment trusts (REITs).

Like publicly traded REITs, non-traded REITs invest in real estate companies in various niches like office space, shopping malls and healthcare facilities. Some might also invest in mortgages and mortgage-backed securities.

Many non-traded REITs, like RealtyMogul’s Income REIT and Apartment Growth REIT, also vet investment opportunities through transparent and rigorous due diligence processes that only 1.1% of applicants pass.

Why Limited Liquidity is an Advantage

Non-traded REITs aren’t available on public markets, meaning that they aren’t as liquid as traditional investments like exchange-traded funds (ETFs). Many non-traded REITs aren't subject to the standards that public investments undergo, like U.S. Securities and Exchange Commission (SEC) audits.

Some non-traded REITs also have higher initial buy-ins and longer lock-up periods than typical stocks and ETFs. If you plan to invest in these REITs, allocate your funds for the long term, which could be three to five or more years.

Limited liquidity might seem intimidating, but this feature is an advantage since non-traded REITs aren’t subject to random swings in the market and the financial news media. Long-term investing is usually more profitable as well.

A Macrobond study found that investing for any one year would have generated a positive return 72.7% of the time, while investing for ten years would have increased this chance to 94.15%.

Share Prices Tied to NAV, not the Market

One of the main advantages of non-traded REITs is that their prices are tied to net asset value (NAV), not the public markets. This aspect helps them avoid high fluctuations that many publicly traded investments like ETFs or index funds are currently facing.

REITs invest in either equity (cash-flow properties) or debt (mortgages and mortgage-backed securities). With equity REITs, fewer factors impact NAV.

The main factors behind NAV increases for non-traded equity REITs are appreciating property values or rents. If a property undergoes renovations and its value increases, then the NAV goes up with it.

With debt REITs, investors look for distributions that are paid from investment income like mortgages. If the payments are consistently stable over time, then the distributions will be as well. Debt REIT investors look for this stability, which in turn increases NAV.

Public REITs Trading at Premiums to NAVs

Despite declining markets, many publicly traded REITs are still trading at a premium to NAV. This means that their prices are trading higher than their NAVs. By trading at a premium, many of these REITs are overvalued.

Non-traded REITs aren’t as overvalued compared to some public REITs that are trading at a premium since prices are tied to NAV, not the markets. Since prices aren’t tied to the markets, you have to worry far less about timing the markets.

Bottom Line

Many investors are realizing steep losses as it seems that numerous sectors are seeing significant declines. One way to gain higher-than-average yields and diversification from current markets is via non-traded REITs.

Non-traded REITs are similar to publicly traded REITs, but they don’t trade on public markets. This factor gives them several advantages like limited liquidity and better pricing compared to publicly traded REITS that are currently trading at a premium.

Discover non-traded REITs and other passive real estate investment offerings on Benzinga’s Alternative Investment Hub.

Photo by Jason Dent on Unsplash