May 5, 2017

New Series: Why Nontraded REITs?

May 5, 2017 | by Beth Glavosek | Blue Vault

If you’re new to the concept of nontraded alternative investments, you may be wondering why financial advisors turn to these products as part of their investment recommendations.

The following are some of the features that set nontraded REITs apart: 

Potentially Attractive Yields

To qualify as a REIT, the company must pay out at least 90% of the money it makes in the form of dividends to the investors. By avoiding taxation at the corporate level, REITs are able to pass on a greater portion of earnings to investors. This can translate into potentially higher yields. 

Dividend Opportunities

REITs are generally considered an “income play” because they’re required to pay out dividends. Investors can expect to receive quarterly distributions in the form of a check. They also may reinvest dividends back into the REIT to purchase additional shares, often at a discount to the offering price. 

Diversification from Other Asset Classes

Real estate values are generally considered to behave somewhat independently of the stock market. This is known as “low correlation.” When other types of investments may be down, real estate may be up, and vice versa. For this reason, real estate can offer a measure of diversification.

Illiquidity

While the term “illiquid” may seem negative, some view it as a positive. Knowing that money in the investment is not readily available for a period of time may mitigate the impulse to trade in and out of the market when market emotions are running high. This illiquidity also gives the REIT the flexibility to invest the proceeds of the offering in long-term investments that will have the potential for income and capital gains over five- to 10-year horizons. Managers of nontraded REITs do not need to please analysts with their quarterly earnings reports the way managers of listed companies too often feel pressured to do.

In upcoming posts, we’ll look at the relative pros and cons of nontraded REITs from the standpoints of financial advisors and investors.