Publicly Traded vs Non-Traded REITs: Key Differences

Three Categories of REITs

Not all REITs are created equal in terms of accessibility and transparency. REITs fall into three categories based on how they are regulated and traded.

Publicly traded REITs: Listed on major stock exchanges (NYSE, NASDAQ). Buy and sell shares through any brokerage account. Share prices are determined by the market in real time. Subject to SEC reporting requirements (quarterly earnings, annual reports).

Public non-traded REITs: Registered with the SEC and subject to regulatory reporting, but shares are NOT traded on stock exchanges. Purchased through broker-dealers, financial advisors, or directly from the REIT. Share prices are determined by the REIT (typically updated quarterly), not by market trading.

Private REITs: Not registered with the SEC, not traded on exchanges. Available only to accredited investors. Minimal regulatory oversight and disclosure requirements.

The distinction between these categories has significant implications for liquidity, fees, transparency, and investor protection. Most financial advisors recommend publicly traded REITs for the majority of investors.

Liquidity and Pricing

Publicly traded REITs:

• Can be bought and sold instantly during market hours
• Share prices fluctuate throughout the day based on supply and demand
• High liquidity means you can exit your position at any time
• Price volatility can be significant (shares may swing 20-30% in a year)

Non-traded REITs:

• Typically have limited redemption programs (quarterly, with caps on total redemptions)
• May suspend redemptions during market stress (this happened to several non-traded REITs in 2020 and 2022)
• Share prices updated periodically (monthly or quarterly), not in real time
• Limited secondary market for selling shares
• Typical commitment period: 3-7 years before the REIT lists or liquidates

The lack of liquidity in non-traded REITs is frequently marketed as a benefit ("you won't see daily price volatility"). In reality, the underlying assets are still changing in value, you just cannot see it. When non-traded REITs eventually mark their assets to market, investors sometimes discover significant declines that were hidden by infrequent pricing.

The illiquidity premium (higher returns to compensate for locked-up capital) that non-traded REITs claim to offer has not been consistently demonstrated in academic studies.

Fees and Returns

Publicly traded REIT costs:

• Brokerage commission: $0 at most brokers
• Ongoing expense ratio (if buying ETF): 0.07-0.12%
• No upfront load or sales charge

Non-traded REIT costs:

• Upfront fees: 3-10% of investment (selling commissions and offering costs)
• Annual management fees: 1-2% of assets
• Performance fees: 10-20% of returns above a threshold
• Potential disposition fees when properties are sold

The fee difference is dramatic. On a $50,000 investment:

• Publicly traded REIT ETF: ~$35-60/year in fees
• Non-traded REIT: $1,500-$5,000 upfront + $500-$1,000/year ongoing

The upfront fees alone create a significant drag on returns. A non-traded REIT must outperform a publicly traded REIT by the fee difference just to break even, and most do not.

Historical return comparison: Multiple studies have found that publicly traded REITs outperform non-traded REITs on average, after accounting for fees. The fee structure, illiquidity, and potential conflicts of interest in non-traded REITs are difficult to overcome through superior property selection.

Making the Right Choice

Publicly traded REITs are better for:

• Most individual investors
• Anyone who values liquidity and transparency
• Cost-conscious investors
• Self-directed investors comfortable with market volatility
• Portfolio diversification alongside stocks and bonds

Non-traded REITs may be appropriate for:

• Investors specifically seeking to avoid daily price volatility (accepting real but hidden volatility instead)
• Very high net worth investors with long time horizons who can absorb the fee structure
• Institutional investors accessing specific deal structures
• Investors working with trusted advisors who have thoroughly vetted the specific offering

Questions to ask before investing in a non-traded REIT:

1. What are all fees (upfront, ongoing, performance, disposition)?
2. What is the redemption policy? Can I get my money out if needed?
3. What is the expected timeline to liquidity (listing or liquidation)?
4. What is the track record of the sponsor's previous non-traded REITs?
5. How does the expected return compare to publicly traded REIT alternatives after fees?

For the vast majority of individual investors, publicly traded REITs (through index ETFs) offer a simpler, cheaper, more liquid, and more transparent way to invest in real estate. The case for non-traded REITs is limited to specific situations with specific deal structures that clearly justify the higher costs and reduced liquidity.