Private real estate investment trusts (REITs) operate much differently than their publicly-traded counterparts.
Shares of private real estate investment trusts (REITs) are typically only offered to institutional investors such as large pension funds and high-net-worth accredited investors because their shares aren’t traded on any public exchanges, which makes them highly illiquid. Private REITs also aren’t required to register with the Securities and Exchange Commission, so they don’t have to provide regular disclosure agreements that can provide valuable insight into their business operations.
Fees are another area where private REITs are much different from comparable investment vehicles. This article examines private REIT fee structures to provide investors with a better understanding of how they work and what types of fees are normally associated with private REITs.
For many investors, real estate is a crucial component of a well-diversified portfolio. Millions of retail investors have used real estate investment trusts to add commercial real estate to their portfolios – more than 145 million American households hold REIT stock in their 401(k)s and other investment funds, the National Association of Real Estate Investment Trusts reports.¹
Stock in public REITs can be bought and sold at will through brokerage firms or trading platforms for standard brokerage or trading fees. Shares of private non-traded REITs, however, are typically offered by brokers and financial advisers who may charge as much as nine to 10 percent of the total investment, the SEC cautions.² However, There can be other applicable fees with private REITs as well, including:
Combined, these fees can consume as much as 15 percent of the value of your investment and erode potential returns. Front-end fees for non-traded REITs typically come in two parts: offering fees and sales commissions, and additional and ongoing fees that are paid from funds raised through the offering period. Private REITs may also charge fees associated with the disposition of assets when it comes time to wind-down the investment.
High investment fees can water down the financial strength of your investment dollars. When looking at potential private REIT investments, investors should consider how the higher up-front fee structure and any ongoing fees associated with private REITs might impact their investment dollars over the holding period of the investment.
Sources:
1. REITs by the numbers, Nareit, https://www.reit.com/data-research/data/reits-numbers
2. Understanding Fees and Taxes, What are REITs, SEC.gov, https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits