By Michael Williford, Spring 2016 Student Intern
Real assets are a separate class of investments from the more traditional retirement vehicles, financial assets. Real assets is a broad class that includes investment products with which the average investor may already be familiar: real estate, commodities, & precious metals. We’ll spend the remaining posts in this series discussing these products because they are the kinds of alternative investment products most likely to affect regular Americans. Most people are generally familiar with commodities and precious metals from news reports and television ads, and investors may feel more comfortable investing in real assets than they would hedge funds or private equity products. Specifically, the average investor seeking investment income during retirement may be pitched something called a Real Estate Investment Trust, or REIT. We’ve talked about REITs on more than one occasion in the past, both here and here, but he message bears repeating since real estate investments in general, and REITs in particular, because they have been one of the more common schemes we’ve seen in recent years.
Registered broker-dealers are still pitching REITs to their clients, oftentimes without a clear explanation of what a REIT actually is. FINRA explains,
A real estate investment trust, or REIT, is a corporation, trust or association that owns (and might also manage) income-producing real estate. REITs pool the capital of numerous investors to purchase a portfolio of properties—from office buildings and shopping centers to hotels and apartments, even timber-producing land—which the typical investor might not otherwise be able to purchase individually.
REITs can offer tax advantages. For instance, qualified REITs that meet Internal Revenue Service requirements can deduct distributions paid to shareholders from corporate taxable income, avoiding double taxation. The REIT must also distribute at least 90 percent of its taxable income to shareholders annually. These distributions are taxable to the extent of any ordinary income and capital gains included in the distribution.
There are two kinds of REITs; those publicly traded on national securities exchanges like the New York Stock Exchange (NYSE) and he NASDAQ, and those that are not publicly traded. These “Non-Traded REITs” have been the subject of FINRA Investor Alerts like this one, and a Securities and Exchange Commission (SEC) Bulletin that can be found here. In a nutshell, both organizations caution investors that Non-Traded REITs can have a lack of liquidity that can make it difficult to get your money back out the investment without significant penalties if you decide to sell the investment, as well as high upfront fees the investor pays to compensate the broker and lower the costs to the offering organization. These fees can be as high as 15%, significantly cutting into the return investors need to supplement their pension or social security income in retirement.
In addition to the high fees, Non-Traded REITs are often difficult to value because they are not actively traded in the market. As a result, an investor can be surprised to learn upon selling the security that the valuations provided by the broker in monthly account statements were simply an estimate, when the actual value upon sale is significantly less. When this happens he investor takes a bath and is frequently left wondering where the money went.
There are other problems that plague Non-Traded REITs, and FINRA has provided a tip sheet of things to consider before investing in this kind of real asset product. You can find it here.
As with any investment, do your research before investing. If you have concerns about an investment you can start your research here, where FINRA offers a number of different educational tools for investors. If you have questions about your broker, check out his or her credentials and utilize BrokerCheck, where you can find out if FINRA has any complaints on record about your broker.