Non-Traded Real Estate Investment Trusts (REITS): Danger for Retail Investors!

Are some investments so risky that they are virtually always unsuitable -- they should never be recommended -- to typical retail investors, regardless of risk tolerance?   Yes.  The purpose of this post is not to generate a list, but to focus on one particular investment that seems to fall into this category: non-traded real estate investment trusts (REITS).

According to a recent article, Fiduciary Duty and Non-Traded REITS by Craig McCann, non-traded REITS performed about as well over the past 25 years as "investing in short and intermediate term U.S. Treasury securities"  but, unlike U.S. Treasury securities non-traded REITS are illiquid and much more risky.  Not only that, non-traded REITS underperformed their traded REIT cousins.  McCann writes, "Investors in the 41 non-traded REITs that became traded REITS or were cashed out suffered $24.25 billion in underperformance."  "Non-traded REITS underperform traded REITS by approximately 6.8 percent annually."

What else is of concern about non-traded REITS? Investors pay a substantial up front fee, averaging 13.2%  This compares with mutual funds, which charge fees topping out at about 5%. 

McCann found that institutional investors tend to stay away from non-traded REITS.  He writes, "institutional investors almost never own material stakes in non-traded REITS." For retail (and institutional) investors interested in real estate there are ready alternatives, including a wide variety of mutual funds.

Non-traded REITS face the triple-whammy of being illiquid, expensive and performing poorly.  According to McCann, "Brokers and investment advisors may have a good-faith basis for recommending that a client make a focused real estate investment, but they cannot justify a recommendation to purchase a non-traded REIT."