Investing in real estate is one of the most significant ways to build wealth, and real estate investment trusts (REITs) have become increasingly popular among investors over the years. However, there is a significant difference between traded and non-traded REITs. This article will help you understand the difference between the two and which one might be more profitable for your investing style.
Traded REITs are publicly traded on stock exchanges and can be bought and sold through brokers or online trading platforms. They are similar to ordinary stocks in that they fluctuate based on market conditions and are subject to the same volatility. Traded REITs provide investors with liquidity, as they can easily buy and sell their shares on the open market, making them more accessible to investors.
One of the advantages of investing in traded REITs is that they tend to have more significant returns over time if they are bought at market bottoms which are notoriously hard to predict but might happen for you if you are astute. A REIT’s value is based on it’s underlying assets which could be much higher than the actual public market price of a REIT. During a downturn in the overall market you might be able to invest in a pool of real estate assets for upwards of a 30-50% discount on their actual prices. Now, the bad part about this is that if you are depending on the REIT’s distributions for your living income, your value could also drop for that same 30-50% for a year or two. It is a double edged sword for sure.
Since traded REITs are publicly traded, they are also more transparent, allowing investors to access information like financial statements, governance reports, and regulatory filings.
On the other hand, non-traded REITs aren’t traded on public stock exchanges and are typically sold through brokers or financial advisors. Unlike traded REITs, non-traded REITs aren’t subject to the same daily volatility, and since they aren’t publicly traded, they aren’t affected by market conditions. The market value stays constant with true real estate values.
Non-traded REITs are a good option for investors looking for long-term investment opportunities, as they provide a more stable investment option with constent non-public market correlated returns. However, they lack liquidity since they are not traded on public stock exchanges. Typically, investors have to pay fees to exit their investment early, making it a less flexible investment option.
One thing to note is that many of the online REITs like the ones offered via RealtyMogul and Fundrise have lowered those early redemption fees to in some cases only a 1% or 2% cost for taking your money out after 1 or two years.
Ultimately, both traded and non-traded REITs have their advantages and disadvantages. Traded REITs can bring higher returns in market uptrends but come with higher volatility, while non-traded REITs are more stable but lack liquidity.
So, which REIT is for you?
It’s good to remember that both types of REITs can deliver a 6%-14% yearly return so they are both interesting. The differences are purely in volatility and liquidity. How long you plan to hold the investment is the key:
Long Term REIT Strategy:
If you are interested in parking your money in a an investment vehicle for 5 to 10 years or more non-traded REITs are for you. These will deliver natural real estate appreciation and consistent yearly returns from income from rent on the underlying assets.
The distributions from these are often paid monthly which you can either keep in the bank or re-invest. The beauty here is that no matter what happens in the public market the value of your investment will only be tied to the value of the real estate which is usually more stable than the public market.
Short Term REIT Strategy:
If you would rather have the option to invest for the short term then take a look at the traded REITs. If you pay close attention to the market then you might know when they are “on sale” (as they were in 2020) and buy them to capitalize on the public market price appreciation as well as the NAV appreciation and regular income distributions. It’s a potential triple win.
Remember, what goes up must come down and if you are not paying close attention your investment could take a large dip overnight.
All investments come with a certain amount of risk. it’s essential to do your research and/or consult with a financial advisor before investing in either option.