Benefits of Nontraded REITs
May 12, 2017 | by Beth Glavosek | Blue Vault
Last week, we discussed the features of nontraded REITs that make them an attractive consideration for investors, including potentially higher yields and dividend opportunities.
They also can give investors a chance to diversify into a different sector than traditional asset classes, as well as the ability to set aside some of their investable assets into a vehicle with illiquid access, which can help manage emotional reactions to market drops.
Some of the other merits of nontraded real estate point to the benefits of high quality, commercial grade, professionally managed properties. Let’s look into each of those benefits:
Access to Large Scale Real Estate Portfolios
Nontraded REITs typically build sizable portfolios by investing on behalf of many shareholders. In fact, by the time a nontraded REIT has entered its maturity phase, it typically owns at least 30 properties, has been in existence for four to eight years, and has more than $500 million in assets under management. This scale is beyond what most individual investors can achieve on their own.
Access to High Quality Real Estate and Sectors
A nontraded REIT provides a vehicle through which individuals can invest in high quality real estate and tailor their strategies to fit their goals and risk tolerance. In Core real estate, for example, properties usually are well located in desirable areas, not under a lot of debt, have high-quality tenants (like FORTUNE 500 companies), and are generally very attractive assets. The tenants usually are committed to long-term leases, even if they vacate early, and may have many years left before lease expiration. REITs that invest in these kinds of properties may appeal to investors seeking a more conservative approach.
Access to Professional Management
Individual investors can leave the day-to-day concerns of real estate management to people who know it best. A nontraded REIT’s real estate team knows how to make the capital improvements necessary to maximize a property’s performance, including pursuing desirable designations like LEED and Energy Star certifications. They also are highly skilled at attracting tenants and negotiating their leases.
Potential Inflation Hedge
Nontraded REITs may provide long-term capital appreciation to investors when they sell their properties or list on a public exchange. A REIT also may require tenants’ rents to increase each year to keep pace with inflation. These features may provide investors with an inflation hedge.
In upcoming posts, we’ll continue to look at the relative pros and cons of nontraded REITs from the standpoints of financial advisors and investors.Go Back
Blue Vault helps me to stay well informed on the financial status of both open and closed nontraded REITs and BDCs, so that I can help my clients better understand the product, before they make the decision to invest and after.