Publicly Traded vs. Non-Traded REITs: Key Differences Explained

Publicly Traded vs. Non-Traded REITs: Key Differences Explained

If you have started exploring real estate investment trusts, you may have noticed that not every REIT works the same way. Some trade on major stock exchanges just like Apple or Amazon. Others are sold through financial advisors and cannot be bought or sold on any public market. Understanding this distinction is one of the most important steps a beginner can take before putting money into REITs.

Both publicly traded and non-traded REITs are real estate investment trusts that own income-producing real estate. Both are regulated by the U.S. Securities and Exchange Commission. But how you buy them, how you get your money back, what you pay in fees, and how you assess their value are very different.

This article explains what separates these two categories, why those differences matter, and what risks each type carries that investors should understand before making any investment decision.

What Are Publicly Traded REITs?

Publicly traded REITs, also called exchange-traded REITs, are registered with the SEC, file regular reports with the SEC, and are listed on a national stock exchange such as the New York Stock Exchange (NYSE) or NASDAQ. According to the SEC's investor.gov, investors can buy and sell shares of publicly traded REITs just like any other publicly traded stock.

Because their shares trade on public exchanges, the market price of a publicly traded REIT is visible to anyone at any time. Investors can check the current share price on a brokerage platform or financial website just as they would with any other stock.

Publicly traded REITs are also typically self-managed, meaning the REIT employs its own management team rather than hiring an outside firm.

What Are Non-Traded REITs?

Non-traded REITs (also called non-exchange traded REITs) are also registered with the SEC and file regular reports with the SEC. The key difference is that their shares are NOT listed on a national stock exchange and are NOT publicly traded on the open market.

According to the SEC's Investor Bulletin on non-traded REITs, these investments are typically sold through broker-dealers and financial advisors as part of private offerings. Because their shares do not trade on an exchange, there is no publicly available market price. Investors generally cannot sell their shares whenever they choose.

FINRA, the Financial Industry Regulatory Authority, describes two main types of non-traded REITs:

• Net Asset Value (NAV) REITs: These regularly calculate the value of their portfolio holdings and offer to sell or redeem shares based on the latest NAV per share. They have become more common in recent years.
• Fixed-Price REITs: These offer shares at a set price and typically appraise their assets far less frequently, perhaps only once per year. They tend to be less liquid than NAV REITs.

How They Compare: A Side-by-Side View

Understanding the key differences between publicly traded and non-traded REITs comes down to several practical factors that affect your investment experience.

Liquidity

Publicly traded REITs are liquid investments. You can buy or sell shares through a standard brokerage account during market hours. If you need to access your money, you can typically sell your shares the same day.

Non-traded REITs are illiquid. According to the SEC, investors generally must wait until the non-traded REIT either lists its shares on an exchange or liquidates its assets to achieve full liquidity. These events may not occur until more than 10 years after you make your initial investment. Some non-traded REITs offer limited share redemption programs, but these are often subject to significant restrictions, may be suspended without notice, and may require you to sell shares at a discount.

Fees

Publicly traded REITs are traded through standard brokerage accounts, so transaction costs are generally the same as buying or selling any other stock. Typical brokerage commissions apply, and many brokers today offer commission-free trading.

Non-traded REITs typically carry significantly higher upfront fees. According to the SEC's investor.gov, these fees can represent up to 15 percent of the offering price. FINRA guidelines and state regulations also limit front-end fees to 15 percent. These fees cover broker-dealer commissions and organizational costs but immediately reduce the amount of your money that actually goes to work in the investment. On a $10,000 investment with a 15 percent fee, only $8,500 would actually be invested. Non-traded REITs may also charge ongoing management fees, property acquisition fees, and back-end fees when the investment eventually concludes.

Share Value Transparency

With publicly traded REITs, the share price is visible at all times on any stock exchange or financial platform. You always know approximately what your investment is worth.

With non-traded REITs, determining the value of your investment is much more difficult. Because there is no market price available, any share valuation depends on periodic appraisals of the REIT's properties. These appraisals may only happen once a year, meaning the stated value of your investment may not reflect current market conditions. The SEC notes that non-traded REITs typically do not provide an estimate of value per share until 18 months after their offering closes, which can be years after your initial investment.

Management Structure

Publicly traded REITs are typically self-advised and self-managed. The REIT employs its own management team whose interests are generally aligned with shareholders.

Non-traded REITs are typically externally advised and managed. An outside management firm runs the REIT's operations and is paid fees for its services. According to the SEC, these fees may be based on the volume of property acquisitions or total assets under management, which can create conflicts of interest between the external manager and investors' best interests.

Minimum Investment

Publicly traded REITs can be purchased for as little as the price of one share, which may be just a few dollars on some platforms that offer fractional shares.

Non-traded REITs typically require minimum investments ranging from $1,000 to $2,500, according to data cited by FINRA and the SEC. This makes them less accessible for smaller investors.

Performance Measurement

Publicly traded REITs benefit from extensive independent research. Major financial data providers, investment analysts, and index providers track listed REIT performance, giving investors multiple ways to measure and compare returns.

Non-traded REITs lack an independent source of comparable performance data. Because they do not trade on an exchange, there is no continuous pricing or publicly available benchmark tracking their performance across the industry.

How They Work in Practice: A Hypothetical Example

The following example uses hypothetical numbers for illustration only. These are not actual figures from any real REIT.

Imagine Investor A and Investor B each have $10,000 to invest in REITs.

Investor A buys shares of a publicly traded REIT through a standard brokerage account. She pays a small or zero commission to buy shares. Her shares begin trading on the NYSE immediately. She can see the share price change throughout the day. If she decides to sell six months later, she can do so in minutes at the current market price.

Investor B purchases shares of a non-traded REIT through a financial advisor. He pays an upfront fee of 12 percent, meaning $1,200 of his $10,000 investment goes to broker-dealer commissions and organizational costs. Only $8,800 is actually invested in the REIT. For the next eight years, Investor B receives regular distributions from the REIT. However, he cannot sell his shares on any public market. When he needs cash unexpectedly after two years, he can only access his investment through the REIT's limited share redemption program, which may offer to buy back shares at a discount to estimated value. After approximately nine years, the non-traded REIT lists its shares on a public exchange, giving Investor B his first full opportunity to sell at a market price.

This example illustrates the trade-off: non-traded REITs may offer certain characteristics such as potentially lower correlation to stock market volatility, but they require a long holding period and sacrifice liquidity and transparency.

Why It Matters to REIT Investors

The publicly traded vs. non-traded distinction shapes your entire investment experience from day one.

Advantages of Publicly Traded REITs

• Liquidity: Shares can be bought or sold during any trading day through any standard brokerage account.
• Transparency: Market prices are publicly available at all times.
• Low entry cost: Can be purchased for the price of one share, sometimes less through fractional shares.
• Low fees: Transaction costs are similar to any publicly traded stock.
• Independent research: Extensive analyst coverage and performance benchmarks are available.
• Self-management: Typically managed by internal teams with more alignment to shareholder interests.

Potential Characteristics of Non-Traded REITs

• Potentially lower volatility: Because shares do not trade on public exchanges, their stated value may not fluctuate with daily stock market movements.
• Income potential: Non-traded REITs may offer competitive distribution yields, though investors should evaluate total return, not yield alone.
• Diversification: May provide real estate exposure with characteristics different from the public stock market.

Important Warnings About Non-Traded REITs

The SEC and FINRA have both issued formal investor bulletins and alerts warning about specific risks of non-traded REITs. These are not minor concerns.

• Distributions may come from principal: The SEC warns that non-traded REITs may pay distributions using investor money or borrowed funds rather than operating income, particularly in the early stages. This can inflate apparent yield while eroding the actual value of your investment.
• High fees reduce returns: Upfront fees of 10 to 15 percent can significantly reduce total returns before the investment has even begun working.
• Conflicts of interest: External managers paid based on acquisition volume may pursue deals that benefit their own fee income rather than investor returns.
• Illiquidity can trap investors: If your financial situation changes and you need your money, you may not be able to access it for years.
• Valuation opacity: The absence of a daily market price means you may not know what your investment is truly worth for extended periods.

Risks and Considerations

Risks of Publicly Traded REITs

• Market volatility: Share prices fluctuate daily with broader stock market movements, even when underlying real estate values are stable.
• Interest rate sensitivity: Rising interest rates can reduce the appeal of REIT dividends relative to bonds and can increase REIT borrowing costs.
• Real estate sector risk: Economic downturns can reduce property values, occupancy rates, and rental income.
• Management risk: Poor capital allocation decisions by management can harm long-term performance.

Risks of Non-Traded REITs

• Illiquidity risk: The inability to sell shares quickly may create financial hardship if your circumstances change.
• High fee drag: Upfront fees of up to 15 percent can significantly reduce your effective return.
• Valuation uncertainty: Without a public market price, determining the true value of your investment is difficult and may depend on infrequent property appraisals.
• Dividend sustainability risk: Distributions may be funded from offering proceeds or debt rather than operating income.
• Conflicts of interest: External management structures may not align manager incentives with investor interests.
• Concentration risk: Many non-traded REITs focus on a specific property type or geographic area.
• Regulatory scrutiny: FINRA and the SEC have issued formal alerts warning that non-traded REITs are sometimes sold using misleading pitches that emphasize high yields while downplaying risks and fees.

Key Metrics to Understand

Whether you are evaluating a publicly traded or non-traded REIT, understanding these metrics helps you make more informed assessments.

• Funds From Operations (FFO): A common REIT metric that adjusts GAAP net income by adding back real estate depreciation and removing gains or losses from property sales. FFO is widely used because depreciation is a non-cash expense that can make REIT income appear lower than it actually is on a cash basis. FFO is more meaningful for evaluating REIT operating performance than GAAP net income alone.
• Net Asset Value (NAV): An estimate of the total value of a REIT's properties and assets minus its liabilities, divided by total shares outstanding. NAV REITs recalculate this figure regularly. For non-NAV non-traded REITs, NAV estimates may only be updated annually.
• Dividend Yield: Annual dividends per share divided by share price. For publicly traded REITs, the denominator is real-time market data. For non-traded REITs, both figures may be less transparent.
• Payout Ratio: Dividends paid as a percentage of FFO. A payout ratio well above 100 percent of FFO may suggest distributions are being funded by debt or return of capital rather than earnings.
• Occupancy Rate: The percentage of available leasable space that is currently rented. Higher occupancy generally means more stable income.

Common Mistakes to Avoid

• Focusing only on yield: High distribution rates from non-traded REITs can be misleading if distributions are funded from investor capital rather than operating income. Always consider total return.
• Ignoring fee impact: Upfront fees of 10 to 15 percent can take years to recover. Calculate how much of your investment actually goes to work after fees.
• Assuming stability equals safety: Non-traded REIT values may appear stable because they lack daily market pricing, but this can mask actual declines in underlying property values.
• Underestimating the holding period: Many non-traded REITs require commitments of seven to ten years or more. Ensure your time horizon and liquidity needs are compatible.
• Skipping the prospectus: Non-traded REITs must provide a prospectus describing strategy, fees, risks, and terms. Review it carefully before investing.
• Not verifying your advisor: Before investing in any non-traded REIT through a financial professional, verify registration using the SEC's IAPD database at adviserinfo.sec.gov or FINRA's BrokerCheck at brokercheck.finra.org.

Frequently Asked Questions

Are non-traded REITs regulated by the SEC?

Yes. Non-traded REITs are registered with the SEC and must file regular reports including quarterly Form 10-Q and annual Form 10-K filings. The difference from publicly traded REITs is that non-traded REIT shares are not listed on a national stock exchange. Investors can access filings through the SEC's EDGAR database at sec.gov.

Can I sell non-traded REIT shares whenever I want?

Generally, no. Non-traded REIT shares are illiquid. Some non-traded REITs offer limited share redemption programs, but these are typically subject to restrictions, may require selling at a discount, and may be suspended without notice. Full liquidity usually requires waiting for a liquidity event such as an exchange listing or asset liquidation, which may take ten or more years.

Why do non-traded REITs pay high distributions?

Non-traded REITs often advertise relatively high distribution rates. However, the SEC warns that these distributions may not reflect actual earnings from operations. In some cases, particularly early in the REIT's lifecycle, distributions may be funded from offering proceeds or borrowed funds. Investors should examine total return including capital appreciation and fees, rather than focusing solely on the distribution rate.

What is the minimum investment for a non-traded REIT?

Non-traded REITs typically require minimum investments of $1,000 to $2,500, based on figures cited in SEC investor education materials. This makes them less accessible to small investors compared to publicly traded REITs, which can often be purchased for the cost of one share.

Are publicly traded REITs more volatile than non-traded REITs?

Publicly traded REIT share prices fluctuate with daily stock market activity, which can create apparent volatility even when the underlying real estate portfolio is stable. Non-traded REIT values change less frequently, which may appear more stable. However, FINRA cautions that this apparent stability can obscure actual changes in underlying property values. The absence of daily price discovery does not mean the investment is safe from loss.

How can I research a non-traded REIT before investing?

Before investing in a non-traded REIT, review the prospectus provided by the offering party. You can also find SEC filings for any SEC-registered non-traded REIT through the SEC's EDGAR database at sec.gov/edgar. Verify that your broker or financial advisor is registered using FINRA BrokerCheck at brokercheck.finra.org or the SEC's IAPD database at adviserinfo.sec.gov.

Conclusion

Publicly traded and non-traded REITs both offer exposure to real estate, but they are fundamentally different investment structures with different risk profiles, fee structures, liquidity characteristics, and levels of transparency.

Publicly traded REITs offer daily liquidity, transparent pricing, low transaction costs, and easy access through standard brokerage accounts. Non-traded REITs are illiquid, carry higher fees, offer limited transparency into share value, and require a long-term commitment that may span a decade or more.

The SEC and FINRA have both issued formal investor education materials warning specifically about the risks of non-traded REITs. That does not mean non-traded REITs are always inappropriate, but it does mean that investors should approach them with careful scrutiny, review all offering documents, and understand clearly what they are purchasing before committing their money.

If you are just beginning to learn about REITs, publicly traded REITs offer a more accessible, transparent, and liquid starting point. As always, every investor's situation is different. Consult a qualified financial professional before making any investment decisions.

Continue building your knowledge by exploring how REITs generate income, how REIT dividends work, and how REITs fit within a broader investment portfolio.

Sources

• SEC (U.S. Securities and Exchange Commission) — Investor Bulletin: Non-traded REITs — https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-89 — August 31, 2015
• SEC (U.S. Securities and Exchange Commission) — Investor Bulletin: Publicly Traded REITs — https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-65
• SEC (U.S. Securities and Exchange Commission) — Investor Bulletin: Real Estate Investment Trusts (REITs) — https://www.sec.gov/files/reits.pdf
• FINRA (Financial Industry Regulatory Authority) — Real Estate Investment Trusts: Alternatives to Ownership — https://www.finra.org/investors/insights/reits-alternatives-to-ownership
• Nareit (National Association of Real Estate Investment Trusts) — What's a REIT? — https://www.reit.com/what-reit
• SEC EDGAR Database — https://www.sec.gov/edgar
• FINRA BrokerCheck — https://brokercheck.finra.org