Investing & Markets

Non-Traded REITs vs. Public REITs

Comparing publicly traded REITs and non-traded REITs across liquidity, fees, performance smoothing, and suitability to help investors understand key trade-offs.

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Public REITs Overview

Traded on stock exchanges like regular stocks, offering daily liquidity with transparent, real-time pricing
Regulated and audited public companies subject to SEC reporting requirements and investor protections
Historical total returns have generally averaged around 9-10% annually over long periods, though past performance does not predict future results
Short-term correlation with equities tends to be moderate to high, though long-term returns are more closely tied to underlying real estate fundamentals

Non-Traded REIT Structure

Not listed on public exchanges, typically purchased through broker-dealers or direct investment platforms
Generally offer limited redemption programs on a quarterly basis, often with gates that can restrict withdrawals
Net asset value is updated periodically rather than daily, based on appraisals and internal valuations
Minimum investments typically range from $2,500 to $25,000 depending on the fund and distribution channel

Fee Comparison

Public REIT ETFs and mutual funds typically carry expense ratios of 0.1-0.8%, making them relatively cost-efficient
Older-generation non-traded REITs historically charged 12-15% in total fees including upfront commissions and ongoing expenses
Newer non-traded REIT structures have generally reduced total fee loads to approximately 3-5%, though they still tend to exceed public REIT costs
Fee drag can significantly impact net returns over time, making total cost comparison an important part of due diligence

Liquidity & Valuation Differences

Public REITs can be bought or sold on any trading day at the prevailing market price with minimal friction
Non-traded REITs may limit redemptions to quarterly windows and can impose gates that suspend redemptions during stress periods
Several major non-traded REITs gated redemptions during the 2022-2023 market environment, highlighting liquidity risk
Illiquidity may be viewed as a feature (prevents panic selling) or a risk (inability to access capital when needed)

Performance Smoothing

Non-traded REIT NAVs tend to appear less volatile because valuations are based on periodic appraisals rather than market pricing
Public REITs reflect real-time market sentiment, resulting in more visible short-term price volatility
Over longer holding periods, total returns between the two structures tend to converge toward underlying real estate performance
Smoothed returns may give a misleading sense of stability and can mask risks that are present but not yet reflected in valuations

Tax Treatment

Both public and non-traded REITs generally distribute ordinary income rather than qualified dividends
Section 199A may provide a 20% qualified business income deduction on REIT dividends for eligible taxpayers
Return of capital portions of distributions reduce cost basis and defer tax, but may result in higher gains at sale
Depreciation recapture is typically taxed at 25% when REIT shares or units are sold, and reporting may vary between 1099-DIV and K-1 structures

When Each May Be Appropriate

Public REITs offer real estate exposure with daily liquidity and generally lower fees, making them the more common choice for real estate allocation
Non-traded REITs may appeal to investors who prefer reduced apparent portfolio volatility and can tolerate illiquidity for extended periods
Comparing net-of-fee returns and understanding redemption limitations are important steps before committing capital to either structure
Consulting a financial advisor about suitability relative to your liquidity needs, tax situation, and overall portfolio is generally recommended

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Public REITs Overview

Traded on stock exchanges like regular stocks, offering daily liquidity with transparent, real-time pricing
Regulated and audited public companies subject to SEC reporting requirements and investor protections
Historical total returns have generally averaged around 9-10% annually over long periods, though past performance does not predict future results
Short-term correlation with equities tends to be moderate to high, though long-term returns are more closely tied to underlying real estate fundamentals

Non-Traded REIT Structure

Not listed on public exchanges, typically purchased through broker-dealers or direct investment platforms
Generally offer limited redemption programs on a quarterly basis, often with gates that can restrict withdrawals
Net asset value is updated periodically rather than daily, based on appraisals and internal valuations
Minimum investments typically range from $2,500 to $25,000 depending on the fund and distribution channel

Fee Comparison

Public REIT ETFs and mutual funds typically carry expense ratios of 0.1-0.8%, making them relatively cost-efficient
Older-generation non-traded REITs historically charged 12-15% in total fees including upfront commissions and ongoing expenses
Newer non-traded REIT structures have generally reduced total fee loads to approximately 3-5%, though they still tend to exceed public REIT costs
Fee drag can significantly impact net returns over time, making total cost comparison an important part of due diligence

Liquidity & Valuation Differences

Public REITs can be bought or sold on any trading day at the prevailing market price with minimal friction
Non-traded REITs may limit redemptions to quarterly windows and can impose gates that suspend redemptions during stress periods
Several major non-traded REITs gated redemptions during the 2022-2023 market environment, highlighting liquidity risk
Illiquidity may be viewed as a feature (prevents panic selling) or a risk (inability to access capital when needed)

Performance Smoothing

Non-traded REIT NAVs tend to appear less volatile because valuations are based on periodic appraisals rather than market pricing
Public REITs reflect real-time market sentiment, resulting in more visible short-term price volatility
Over longer holding periods, total returns between the two structures tend to converge toward underlying real estate performance
Smoothed returns may give a misleading sense of stability and can mask risks that are present but not yet reflected in valuations

Tax Treatment

Both public and non-traded REITs generally distribute ordinary income rather than qualified dividends
Section 199A may provide a 20% qualified business income deduction on REIT dividends for eligible taxpayers
Return of capital portions of distributions reduce cost basis and defer tax, but may result in higher gains at sale
Depreciation recapture is typically taxed at 25% when REIT shares or units are sold, and reporting may vary between 1099-DIV and K-1 structures

When Each May Be Appropriate

Public REITs offer real estate exposure with daily liquidity and generally lower fees, making them the more common choice for real estate allocation
Non-traded REITs may appeal to investors who prefer reduced apparent portfolio volatility and can tolerate illiquidity for extended periods
Comparing net-of-fee returns and understanding redemption limitations are important steps before committing capital to either structure
Consulting a financial advisor about suitability relative to your liquidity needs, tax situation, and overall portfolio is generally recommended

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The information above is for educational purposes only and does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. Any historical figures are for illustration only, and past performance does not guarantee future results. Tax laws, regulations, and contribution limits change frequently, the details here may become outdated. Individual circumstances vary. Consult a qualified financial advisor, CPA, or attorney for guidance specific to your situation. Rubric Advisors is registered with the California DFPI; registration does not imply a certain level of skill or training.

Non-Traded REITs vs. Public REITs

Public REITs Overview

Non-Traded REIT Structure

Fee Comparison

Liquidity & Valuation Differences

Performance Smoothing

Tax Treatment

When Each May Be Appropriate

Public REITs Overview

Non-Traded REIT Structure

Fee Comparison

Liquidity & Valuation Differences

Performance Smoothing

Tax Treatment

When Each May Be Appropriate

Related Topics

Introduction to Public Real Estate

Introduction to Private Real Estate

Real Estate Syndications

Non-Traded REITs vs. Public REITs

Public REITs Overview

Non-Traded REIT Structure

Fee Comparison

Liquidity & Valuation Differences

Performance Smoothing

Tax Treatment

When Each May Be Appropriate

Public REITs Overview

Non-Traded REIT Structure

Fee Comparison

Liquidity & Valuation Differences

Performance Smoothing

Tax Treatment

When Each May Be Appropriate

Related Topics

Introduction to Public Real Estate

Introduction to Private Real Estate

Real Estate Syndications