Smart Investing


April 13, 2012


Beware the lure of the non-traded REIT

I’ve discussed non-traded real estate investment trusts before, also known as REITs. But after reading a disturbing article in a financial adviser trade magazine called Investment News, I thought the time had come again to inform investors what these are and why they make no sense as an investment option.

The Investment News article talks about a woman named Susan Fox from Plano, Texas, who purchased a non-traded REIT from her broker at Cornerstone. After the REIT began showing some quarterly losses, Fox grew worried and met with her broker to discuss her concerns. Yet instead of her concerns being addressed, the broker sold her another non-traded REIT.

I have seen many good salespeople in the financial services industry who might mean no harm, but end up leaving you, the investor, to pay for those large commissions that salesperson is making.

Please be aware of the two main types of REITs: non-traded (or private) and public. On the private REIT, you turn your money over to the broker who, in turn, fills out the application and sends that along with your check to the company. The company uses your money, along with others', to buy some type of real estate, many with leverage that increases the risk.

You are generally told you will receive monthly or quarterly checks that pay a good return. You have little or no access to your money, and sometimes there can be a secondary market for these private REITs that will take up 30-40 percent after you have already lost 20-30 percent, leaving you with about 40 cents on the dollar from your original investment. The broker, on the other hand, receives a big fat commission, which could be as high as 8 percent.

What you could have done is invested into a public REIT, which trades on the stock exchanges and can be sold any day or time the markets are open. You will still receive monthly or quarterly checks that would be equal to or perhaps greater than the private REIT counterparts. The cost of buying that public REIT through a full-service broker would equal about $105 if you were to buy, say, 100 shares of Public Storage, which trades under the symbol PSA at $137 per share. Please note, this is not a recommendation to buy Public Storage — I’m just using it as an example. Your total investment in PSA would be about $13,800. If you were to invest this into a private REIT, the broker could earn as much as $1,104 gross commission versus the $105 gross commission on selling you 100 shares of Public Storage.

So, do you get more for your money when buying the non-traded REIT through your broker and paying him more in commission?

Getting back to Fox and her situation with the Inland American Real Estate Trust, in the past five years, her investment has fallen from $10 per share to $7.22 per share, a decline of 28 percent. Had she invested in Pubic Storage five years ago, she would have paid $93.97, and today the price per share has increased to $137 per share, a 44 percent gain.

While I don’t know what Fox received in dividends over the five-year time frame during which she held Inland American Real Estate Trust, I can tell you that over that five-year period she would have received another $14.30 in dividends from Public Storage, adding another 15 percent return on top of the 44 percent, for a total return of 59 percent.

I have seen too many investors come through my doors with non-traded REITs with losses, and my hands are tied. The best I can say is to hold on and hope for the best. I’ve been in the financial industry for 30 years, and I cannot tell you of one person who had a private REIT and told me what a great return they had on it. So, what I’m saying is never buy a non-traded REIT. Why should you, when there are public REITs that are just as good, if not better, that are available and are liquid?

Please be kind to your friends and family and pass this column along, so they don’t get stuck in one of these illiquid, non-performing, good-for-nothing investments.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


April 13, 2012