Real estate has been a real bad investment for the past year or so. At least that's been the case with publicly traded real estate investment trusts (REITs) as measured by the FTSE NAREIT equity index, which nosedived 38% last year, followed by a whopping 32% loss in this year's first quarter.

But there's another way to invest in real estate that's not tethered to the vagaries of the public markets—non-traded REITs, also known as private REITs. Both types of REIT operate in similar ways: They own-and in most cases, manage-income-producing real estate; they distribute at least 90% of their taxable income to investors as dividends; and they're registered with the Securities and Exchange Commission.

But non-public REITs significantly differ from their public counterparts in how they are priced and traded, and in how liquid and transparent they are. Non-traded REIT prices, for example, are set by the REIT sponsor, and the industry standard is $10 per share. That price will remain constant during the life of the fund, which can last anywhere from five to ten years (or more). After that, its investors hope to cash out through an initial public offering, by selling the fund to another portfolio or by selling off internal properties.

Detractors say the pricing of non-traded REITs is much less clear than it is for publicly traded ones, where prices are set by the open market. "The number one issue is visibility," says Paul Puryear, a REIT analyst with Raymond James Financial. "I'm not sure that investing in something you know less about is advantageous. Intuitively, it doesn't make sense."

Proponents recognize that a lack of transparency can be negative for some investors, but they believe non-traded REIT prices more accurately reflect the value of the underlying real estate than do public REITs, whose prices are set by the whims of Wall Street. "That's a fairer valuation process than the fear and greed that drive equity prices," says Michael Phillips Black, a wealth manager in Scottsdale, Ariz. "A lot of REITs lost 60% to 80%, but the value of the underlying real estate didn't go down that much."

Price stability and dividends are seen as major selling points for non-traded REITs. "They're designed to produce consistent income streams, and they could be an alternative to diversify your portfolio because they're not correlated to the broader equity market," says John Towle, chief marketing officer at Cole Real Estate Investments, a Phoenix-based real estate investment company.

Non-traded funds currently pay dividends ranging from 5.5% to 8%, though most fall within 6% to 7%, which is the group's historical average. That's a couple of percentage points higher than what public REITs typically pay, though the latter have recently plunged in price, which has boosted their collective yield to about 9%, according to the National Association of Real Estate Investment Trusts.

Heavy Load
Public REITs can be bought for as little as $7 with a Scottrade account, while non-traded REIT investors can expect to pay a front-end load of 7% that goes to the advisor, plus another 3% that goes to the company selling the product. Tack on additional fees such as organization and offering costs, along with acquisition fees to buy properties, and total fees could run as much as 12% to 15%.

"I don't know why an investor would want to go that direction when you have much less costs with public REITs," Puryear says.

"There are no fees in the publicly traded world other than traditional trading fees."

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