Investors Can’t Pull Their Money Out of Non-traded REITs (2024)

FAQs

Investors Can’t Pull Their Money Out of Non-traded REITs? ›

Since most non-traded REITs are illiquid, there are often restrictions to redeeming and selling shares. While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value.

Their dividend rate is higher than most equities or other fixed-income investments. REITs have a low correlation with other assets, which makes them an excellent choice for portfolio diversification. REITs are highly liquid; if you need to pull your money out, you simply sell your shares on a stock exchange.

Interest Rate Risk: Non-traded REITs can be sensitive to interest rates. An increase in interest rates may erode the relative attractiveness of the income generated, and may lower the value of the underlying property.

The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.

Because these Non-traded REITs are not listed on an exchange, their shares are illiquid, and they have substantial valuation and redemption risks as a result. Investors of non-traded REITs can typically only sell their shares after a holding period of a year and under a limited repurchase program.

Since most non-traded REITs are illiquid, there are often restrictions to redeeming and selling shares. While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value.

BREIT allows withdrawals of as much as 2% of the fund's net asset value monthly or 5% each quarter. Investors pulled back from real estate as high borrowing costs cut into property values. Now, the Federal Reserve has signaled its monetary tightening campaign is winding down.

Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.

The biggest risk to REITs is when interest rates rise, which reduces demand for REITs. 6 In a rising-rate environment, investors typically opt for safer income plays, such as U.S. Treasuries. Treasuries are government-guaranteed, and most pay a fixed rate of interest.

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.

What is the largest non-traded REIT? ›

Blackstone REIT is the largest of the nontraded REITs. Though fundraising edged lower overall in 2023, money was still accumulated in the tens of billions of dollars, and at least one record was set.

If you own REITs in an IRA, you won't have to worry about dividend taxes each year, nor will you have to pay taxes in the year in which you sell a REIT at a profit. In a traditional IRA, you won't owe any taxes until you withdraw money from the account.

Besides larger fees, one of the other negative aspects of private and non-traded REITs is risks and performance. They may contain questionable conflicts of interests associated with the properties purchased, the management of the properties, the very REIT itself.

But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.

A REIT is subject to a tax equal to 100 percent of the net income derived from prohibited transactions (IRC § 857(b)(6)(A)). A prohibited transaction is a sale or disposition of property held for sale in the ordinary course of a trade or business other than foreclosure property (IRC § 857(b)(6)(B)(iii)).

Properties can generate rental income, which, after collecting fees for property management, provides income to its investors. These REITs generate income from renting real estate to tenants. After paying expenses for operation, equity REITs pay out dividends to their shareholders on a yearly basis.

General requirements

The REIT's ownership (which must be proven by transferable shares or by transferable certificates of beneficial interest) must be held by at least 100 shareholders for at least 335 days of a 365-day calendar year (or equivalent thereof for a short tax year) for the second taxable year and beyond.

Investors can buy and sell shares of public REITs at any time during trading hours. With private REITs, on the other hand, investors may have to wait for a redemption event, which can occur quarterly or annually, before they can cash out their investment. Additionally, private REITs may charge redemption fees.

A company that qualifies as a REIT is allowed to deduct from its corporate taxable income all of the dividends that it pays out to its shareholders. Because of this special tax treatment, most REITs pay out at least 100 percent of their taxable income to their shareholders and, therefore, owe no corporate tax.