Non-Traded Real Estate Investment Trusts Are Risky, Illiquid
If you are a retail investor in San Francisco whose broker is recommending that you invest in non-traded real estate investment trusts (non-traded REITs), you should strongly reconsider.
While often touted as a security that allows investors to make money without having to worry about market volatility – this type of investment is actually still high risk, illiquid, and not suitable for many customers including retail investors, retirees, and other conservative investors with low-risk tolerance levels.
Non-traded real estate investment trusts recently took a huge hit a few months ago when the Coronavirus pandemic struck, leaving many investors with illiquid investments that they can’t sell.
What Are Non-Traded REITs?
Non-traded REITs purchase and hold residential and commercial real estate. Unlike real estate investment trusts that are publicly traded, these REITs are not listed on public exchanges. They are sold to investors by brokers. The value of this type of investment is determined by the valuation of its assets and there are no accreditation limits for non-traded real estate investment trusts. However, its illiquidity can be a huge cause for concern for retail investors who may need to access their funds sooner.
These REITs can be hard to sell and typically have a 5- to 70 year hold period. They are sold by broker-dealers to customers. They tend to charge high upfront fees that translate into healthy commissions for firms and their brokers. This is one reason why so many broker-dealers love selling them to customers.
Even though these investments aren’t listed on public markets, they can be adversely affected by economic conditions. This is what happened when COVID-19 hit and investments in non-traded real estate investment trusts dropped 69% over March alone causing losses for investors.
Many investors are now hard-pressed to find someone to purchase their non-traded REIT, meaning that they can’t access the money that they’ve invested in these illiquid securities even if they need to during these very tough times.
The Impact Of COVID-19 On This Investment Type
Meanwhile, the pandemic has continued to impact non-traded REITs. According to The DI Wire, in May, fundraising for this type of investment fell 22.4% to $248M from $319M the previous month. Not only that, but a number of these REITs have suspended their monthly dividend payments to investors.
Even pre-COVID 19, non-traded real estate investment trusts were not suitable for many investors. Some states are now prohibiting investors from placing more than 10% of their funds in these investment types. Yet broker-dealers and their registered representatives continue to market and sell them to customers.
San Francisco REIT Fraud Lawyers Fighting for Investors
Shepherd Smith Edwards and Kantas (SSEK Law Firm) represents investors throughout the San Francisco Bay Area in helping them recover the losses they suffered because brokers made unsuitable recommendations of real estate investment trusts, breached their fiduciary duty, churned in customer accounts, or engaged in other fraudulent or negligent actions.
During the last 30 years, we have recovered many millions of dollars on our clients’ behalf. We have successfully represented thousands of investors against broker-dealers all over the country. Contact SSEK Law Firm today using our online form or calling us on (415) 287-0877.