Add Private REITs to the Bonfire
- Joshua M Brown
- June 11th, 2012
Don't fall out of your chair when I tell you that private (or non-traded) REITs make a for a stupid investment. If you're paying any attention to my writings, you would already know this.
How would you know? Simple, as I talk about in my book Backstage Wall Street:
1. Brown's Law of Brokerage Product Compensation states that the more money a broker or financial salesperson is paid to sell you something, the worse it is for you. The commissions on non-traded REITs are in the range of 7% versus the $5 trade you could do to buy a public REIT.
2. Opacity is always indicative of information assymetry, and information assymetry always benefits The Street, not the clientele.
3. High-fee funds or vehicles will never match the underlying index by definition - the fees act as a drag in bull markets and add insult to injury in bear markets.
4. The only self-justification brokers ever had in recommending private REITs was that because they don't trade and reprice publicly each day, they somehow served to "smooth the volatility" of a client's portfolio. Which is Bullshit to the second power (BS²).
Anyway, the data is out on this schlock, from Bruce Kelly at Investment News:
Measured after a sale of assets, a merger or an IPO, nontraded REITs over the past two decades consistently have underperformed the broad market of real estate investing, according to a new study.
Comparing 17 “full-cycle” nontraded real estate investment trusts with two customized benchmarks, the study found that just five such REITs outperformed each of those market indexes. That means 71% of the REITs included in the study underperformed the study's customized benchmark, in large part due to fees.
Performed by consultant Blue Vault Partners LLC and The University of Texas at Austin McCombs School of Business, the study is likely the first systematic examination of the realized returns for investing in nontraded REITs. Released June 1, it is titled “Nontraded REIT Industry Full-Cycle Performance Study.”
I didn't need the data, I had my instinct and personal experience. But the data doesn't hurt either. Non-traded REITs are an automatic no for me.
Don't have the book yet? It's a layup Father's Day gift for dad:
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.