A non-traded REIT is a form of real estate investment tool which can reduce taxes by providing potential distributions that are partially tax-favored. Companies that own and operate income-producing real estate or related assets typically own non-traded REITs.
Unlike many real estate companies, a non-traded REIT does not develop real estate properties for resale but instead, non-traded REITs buy and develop property primarily to operate them as part of their investment portfolio, all of this with a start-engine investment. These assets may include commercial office buildings, multi-family housing, hotels, resorts, storage units, and warehouses. You can consult with real estate brokers to find out more about REITs.
Non-traded REITs are a way to invest in commercial real estate without a large outlay of capital or investment risk. If you were to purchase commercial property in a traditional transaction, then you assume most of the investment risk and need a surplus of capital.
A non-traded REIT can behave more like a direct real estate investment, and its share price value does not change as frequently as a publicly-traded stock. Although a Non-Traded REIT does not trade on an exchange, its value can still be affected by economic changes, real estate market changes, and changes in interest rates. Also, the importance of underlying properties will fluctuate and may be worth more or less than initially paid. Additionally, there is no guarantee that the investment objectives will be met.
Investing in non-traded REITs involves a high degree of risk. You should carefully review the “Risk Factors” section of the prospectus, which contains a detailed discussion of the material risks you should consider before investing in shares of common stock.
NTRs Provide Access to Potential Benefits of Commercial Real Estate
Individual investors can rarely acquire a portfolio of commercial real estate properties independently. With a REIT, they can develop the income potential of commercial real estate without owning properties directly.
A REIT (traded or non-traded) allows individual investors to indirectly invest in commercial real estate because the REIT pools capital from multiple investors to buy income-producing buildings.
Are Non-Traded REITs Right for You?
Non-traded REITs may be an attractive investment if any of the following apply to your situation:
Key Difference in Non-Traded REITs
Note that an investment in non-traded REITs differs from an investment in direct real estate. For instance, an investment in direct real estate pays income from the cash flow from the properties. A REIT may pay distributions from cash flow from operations of the properties the REIT owns and other sources, which includes borrowings and offering proceeds, which constitute a return of principal and may lower returns. The availability and timing of distributions a non-traded REIT may pay are uncertain and cannot be assured. Remember, non-traded REITs, like an investment in direct real estate, do not provide ready liquidity. If investors can redeem shares, then the redemption price may be worth less than their original investment.
Allocations of dividends from Non-Traded REITs are ordinary income, capital gains, or return of capital. Part of the dividend that exceeds the REIT’s taxable income and is not taxed is the return of capital distribution. Instead, the investor’s cost basis in the stock is reduced by the distribution amount. The excess of the net sales price over the reduced tax basis is treated as a capital gain for tax purposes when selling shares. So long as the appropriate capital gains rate is less than the investor’s marginal ordinary income tax rate, a high return of capital distribution may be attractive. Each investor’s tax situation is different. Please consult with a financial advisor for more information on understanding REIT dividends along with their tax obligations.
Investing in non-traded REITs, involves a high degree of risk. You should carefully review the “Risk Factors” section of a prospectus, which contains a detailed discussion of the material risks that you should consider before you invest in shares of common stock.