As reported recently by the Wall Street Journal, investment in non-traded Real Estate Investment Trusts ("REITs") is at an all-time high and poised to continue to rise. Some estimates anticipate more than $18 billion to be invested in non-traded REITs by the end of this year.
Solicited with the prospect of annual yields of more than 6%, income-seeking investors have had their hard-earned savings steered into non-traded REITs, oftentimes without a complete disclosure of the risks involved. Many brokers and financial advisors pitch REIT investments to their retirement and near-retirement aged customers, emphasizing the perceived "safety" of real estate investment coupled with the higher than normal annual yield, but do not fully explain the associated risks and bloated commissions (as high as 15% in some cases).
What many investors are not told is that because these investments are not publically traded, while the REIT itself may report to them a specific value for their shares, the actual value of their investment may not be readily available - and could even be 10-20% lower if sold on secondary markets. This discount is often caused by the illiquidity of the investment. In other words, sellers are forced to sell for less than what they paid in order to get out of the investment (also called liquidating the investment).
There is still the potential for big money to be made by the issuers of these products and the brokers who sell them, so firms like LPL Financial and Ameriprise Financial, along with others, continue to market them to their customers.
Unfortunately, illiquidity and large losses have been incurred by REIT investors in the past and may be looming on the horizon for investors who may currently own unsuitable REITs.