Why Ray Lucia Likes Nontraded REITs

In a comment left on my review of Ray Lucia’s Buckets of Money this morning, Kirk wanted to know what Ray Lucia likes about nontraded REITs. Here is what I found:

• Nontraded REITs do not have the volatility that public REITs have.

• Nontraded REITs can bring in capital for purchasing properties. Public REITs cannot raise funds as easily (they can borrow or issue new shares). According to Lucia, this could put nontraded REITs in a better position to get the best deal and the most diversification. I’m not sure how bringing in new capital doesn’t negatively affect current owners of nontraded REITs.

• Nontraded REITs are usually bigger than public REITs and are therefore more diversified.

I found this point confusing because a few paragraphs prior, Lucia wrote this: “…nontraded REITs don’t fluctuate daily in price. They are usually private en route to becoming a listed, or public, company, or the properties are scheduled to be sold in the marketplace.”

• Part of the sales load on nontraded REITs goes to pay for due diligence. Lucia says that public REITs aren’t in the acquisition phase like nontraded REITs are. Acquiring properties requires due diligence.

Lucia tries to put a positive spin on loads:

“Instead of seeing load, transparent or otherwise, as some burdensome surcharge, look at it as a positive way to ensure the private REIT will have the capital to put to work and get a good deal for you. What’s more, if you buy a REIT that’s in an acquisition mode, you don’t buy it to sell right away. You need to hold it long enough to recoup those expenses. Spread out over the length of the time you own the REIT, th eload may not amount to much.”

Sounds kind of “salesy” to me.

7 thoughts on “Why Ray Lucia Likes Nontraded REITs”

  1. As I suspected, this is a nothing more than a sales pitch using misleading statistics to earn a higher commission.

    Is he saying publicly traded REITs don’t do due diligence on properties? They just pay whatever for properties? This is ridiculous. Every REIT has real estate pros doing due diligence.

    More diversified? Is he nuts? Usually, private RETIs are less diversified. That is often their pitch. You buy a nontraded REIT that specializes in medical office buildings or self storage units. Nontraded REIT companies argument is if you want a diversified hodge podge of properties you buy a publicly traded REIT. If you want experts or specialization, you buy a private REIT.

    Investors won’t find any better diversification than the Vanguard REIT product, which owns every conceivable commercial classification out there from solid publicly traded REITs.

    I am sure there is useful information in the book, but I am thinking the book shouldn’t be about buckets of money. It should be buckets of another substance if you know what I mean.

  2. Personally, I like Grangaard Strategy more than Buckets. To me, “Buckets” sounds like some sort of scheme to help the good ol’ average Joe. I used to work with a guy at PaineWebber who used to change the way he talked, depending on the client. Whenever a refinery worker would come in, he’d turn on the good ol’ boy accent. It was disgusting.

  3. The first bullet point made me laugh out loud. It doesn’t mean their value doesn’t fluctuate; you just can’t get a quote on it every second of the trading day (of course, he doesn’t mention the disadvantages of illiquid investments). #2 also seems ridiculous at face value; they both have to issue new shares or take on more debt to fund purchases. #3 I don’t buy at all. If you believe #4, I have a bridge to sell you in Brooklyn. These arguments look pretty cheesy to me.

  4. Horrible advice. Private REIT’s are awful.

    Compared to public REIT’s, they lack general transparency, have sales charges of 10-15%, are illiquid, and are usually less diversified.

    Several of the largest private REIT’s cut their dividends, cut their stock price, and suspended share redemptions in 2009 and 2010.

    Now, not only have you lost your shirt, but you can’t even get out!

  5. There is a lot of misinformation here. I personally have invested in private REITs for over 10 years. It is a slightly more complicated investment than some other things out there but in no way “terrible”. Let’s go point by point.

    1. True. Private REITs are much less volatile than public REITs. The actual share price that you buy in at remains stable throughout the life of the REIT until there is a liquidity event (it is sold or publicly listed). There is no daily fluctuation like a security that trades on an exchange (although of course the value of the real estate would fluctuate, that is a give. The home you live in does also.) However, you’re investment does not fluctuate and if you re-invest your dividends you can usually buy back in at an even lower share price.

    2. Private REITs do purchase many more properties in general than public REITs. The whole point of a private REIT is to raise equity to purchase the real estate portfolio that makes up the REIT, basically from scratch. Thus, there is much more capital to deploy while still in the acquisition phase, which would be when the REIT is still a private offering. When the REIT closes to private investors, it is because they raised the capital they were targeting to need. By the time the REIT exits, the portfolio is essentially completed. This isn’t to say public dont buy properties; they do. But to much less of an extent. Therefore privates often do get the best prices because of having more capital to work with, but other variables would also come into play such as the real estate cycle, etc. HOWEVER, none of this makes it More diversified. All private REITs are still focused in a niche area as opposed to a broad fund buying different types of properties.

    3. False. Most private REITs would be smaller because they are earlier in their infancy than a public REIT and if they go the route of being acquired instead of listing then they still end up as a piece of a larger REIT.

    4. This point is true to a certain extent. Publicly traded REITs make far fewer purchases than private. See above. Also, what no one is saying is that the “sales load” is built in, not deducted off your profits. You will know up front what they REIT is yielding, it will be paid monthly, and you will usually make some capital appreciation on the back end when it exits. If you are happy with the yield and know what to expect upon leaving the REIT the sales load is irrelevant. It’s funny, in a hedge fund the manager usually takes 20% of profits but there’s no lack of investors is there? Why, because they don’t care how much the manager makes as long as they make a certain return. The same thing applies to a degree here. In today’s low interest rate environment, REITs are yielding 7% annually, paid monthly, while your capital is used to purchase real estate. You make that return AFTER sales load. There’s no surprises or trickery here. As far as liquidity, private REITs are notoriously illiquid. That’s why you don’t have the big swings like you may with a public REIT that trades on an exchange and investors can pull money from whenever they choose. That’s also why private REITS call for wealthier “accredited” investors. No informed person should be putting money that they may need liquid into these. It’s just not appropriate for the vehicle and you should know that up front. Also, the point of a private REIT is not to be diversified. It’s to know the one REIT you’re investing in Extremely well instead of a “hodge podge” basket of real estate that you know nothing about. Granted, not all REITs are created equal. You need to know how to tell the difference before you put money into one. You need to know how financing is done, the methods they’re using, know where you are in the real estate cycle, etc to be an informed investor. If you can do that, private REITs can be a very nice investment. Not “terrible” at all.

  6. So why go thru all this convoluted twisted logic again why not just say private REIT investments are sophisticated instruments for consument professionals otherwise they are terrible and you can easily get burnt.
    Well sales load/commission is what the market-trading and investment is all about. Getting clipped is a cogent factor. Lets be adults. Each has its place in the market or it would not exist.
    Bottom line Buckets is really all about what most insurance agents turned financial advisors are all about i.e. grinding commissions. Its ok to charge them just be up front with them otherwise when you try to deceive then you should set up shop in a shady area. On the other hand, I know a couple advisor types that bad mouth private REITS and tell how much they lost in them, mainly cause they dont have access to these types of investments and they want to grind the investors portfolio 2% a year in public investmets. Everyone has a secret agenda and cloaks it in all we want to do is help you. Not make a buck.

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