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Why You Should Consider Adding Non-Traded REITs To Your Portfolio

·7 min read

To say the year 2022 has been rocky for investors would be quite an understatement. Inflation has been at a 40-year high, which has pushed up the price of everything from staples like wheat and potatoes to finished consumer goods like mobile phones and cars.

That has affected the stock market, which has trended downwards almost all year. Traditionally, this is when investors start looking for alternative investments.

Alternative investments are defined as any investment apart from stocks and bonds. They include things like commodities, precious metals and real estate, which is perhaps the most popular alternative investment.

Alternative investments are a great way to diversify investment portfolios because their value is not directly tied to the stock market’s performance. On the real estate side, real estate investment trusts (REITs) are a great place to start. Keep reading to find out why.

See also: Want To Protect Your Portfolio From A Recession? Some Say Buy Farmland

What Is A REIT?

REIT is an acronym for real estate investment trust. REITs are funds that strategically deploy investor capital to purchase real estate or real estate-related assets. In most cases, the assets in a REIT are spread across a large geographic footprint both to diversify its holdings and maximize its earning potential.

Non-traded REITs

Although many REITs are publicly traded on exchanges — they are known as public REITs — there is another, less well-known type of REIT called a non-traded REIT. If you haven't considered adding them to your portfolio, they offer a lot of advantages that make them worth a look for investors seeking refuge from a volatile stock market.

Passive Income

Any famous author, music producer or songwriter will tell you that there is no money better than mailbox money — the money they get in royalties from their previous work that shows up in their mail in the form of a check.

Although these days, most of the payments are made via wire transfer or direct deposit, the bottom line is that passive income is a real winner. That’s because the people who receive it don’t have to actively work to earn it. Investors in non-traded REITs get paid in much the same way.

REIT investors receive equity in the fund’s holdings, which entitles them to a share of the revenue generated by the assets. That’s because their investment makes them partners in the offering. As partners, they receive payments in the form of distributions, which are usually made on a quarterly basis (although some pay out monthly). Additionally, REIT investors will benefit from any asset appreciation when or if an asset held by the fund is sold.

They do all of this without having to scout assets and conduct due diligence, manage assets and deal with tenants or handle the accounting. In many ways, being a shareholder in a private or public non-traded REIT entitles the investor to all the best aspects of real estate ownership without any of the headaches. However, that’s not where the benefits stop.

Related: This Little Known REIT Has Produced Double Digit Annual Returns For The Past Five Years

High-Quality Assets

In most cases, the types of real estate owned by private REITs is institutional quality. That means the assets are solid enough in their profile and revenue potential that institutional funds like state retirement funds, 401k plans and private pensions target them for their portfolios. Examples of these kinds of assets include:

  • Class A and Class B multifamily apartment buildings in top cities

  • Medical facilities such as hospitals and medical office parks

  • Large storage facilities

  • Shopping malls and other large retail operations

  • Commercial centers like industrial parks and warehouses

All of these assets have the capability to generate impressive monthly revenue. Unfortunately, they also cost so much that most investors simply can’t come up with the capital to buy them. Institutional-quality investments like these usually cost tens of millions of dollars. So, as an everyday investor, the chances of you owning even one of them are remote. However, you can buy into non-traded REITs for as little as $1,000 in some cases. Even the more expensive private REIT buy-ins between $25,000 and $100,000 represent a small fraction of the down payment on an institutional asset.

Experienced Management And Deep Connections

The day-to-day decision-making in most private REITs is done by its general partner. The general partner, or offering sponsor, is usually a real estate investment firm with a strong track record of success in selecting top-quality assets and making money on them. They also generally have deep networks of contacts in real estate circles that allows them to access deals that may not even come on the market.

In fact, doing off-market deals for less than their asking price is one of the key strategic elements of many non-traded REITs. Not only are they getting top-level institutional deals, they are also getting these deals at investor-friendly prices, which only creates additional upside for the REIT’s investors. Everyone wants to be connected to the top professionals in an industry like real estate, but these connections are hard to establish if you didn’t go to school with them or work with them in the past.

Private REITs offer investors that kind of limited access. In many cases, once you become known to the general partners and firms who sponsor these offerings, they will begin coming to you early with their future offerings. That may result in an opportunity for you to get preferred shares, which will entitle you to an even larger payout than that of a standard limited partnership share.

Where Can You Find Non-traded REITs?

When you hear the term non-traded REIT, it’s easy to assume they are hard to find. However, the reality is a little different. Numerous reputable investment platforms such as Fundrise, Yieldstreet and RealtyMogul offer some compelling non-traded REITs. If you peruse their offerings, you will find an incredibly diverse range of non-traded REITs in a number of different real estate sectors.

Better still, many of these offerings will have different strategies you can choose from to tailor your portfolio. Whether you want to do a value-add strategy with a long-term payout on property appreciation or a core strategy that focuses on generating passive income, you will find a REIT that suits your needs. The beauty of these REITs and their moderately priced buy-ins means you can diversify your portfolio by picking several of them.

See also: Benzinga’s List of Best Non-Traded REITs

Final Thoughts

These are difficult times for investors, but that doesn’t mean you have to suffer the volatility of the stock market. If you’ve been looking for a way to diversify your portfolio and get into some investment offerings that can perform independently of the Dow Jones, Nasdaq or other stock indexes, non-traded REITs may be the perfect tonic for what ails your portfolio.

As always, you must remember there is no guarantee in investing, and even the most well-run non-traded REITs can miss their investment targets or lose money. You still must choose wisely, and it’s always a good idea to consult with a financial professional before investing. But the good news is that even in these difficult times, non-traded REITs offer a great way to keep growing wealth.

This week’s private markets real estate highlights:

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