Understanding non-traded REITS.

What is a REIT? 

A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing real estate. To qualify as a REIT under the Internal Revenue Code, the company must meet several criteria, including being managed by a board of directors or trustees, having at least 100 shareholders after its first year, and generating the bulk of its income from real estate-related sources like rent, mortgage interest, or property sales. At least 75% of its assets must be in real estate, cash, or U.S. Treasurys, and the company must distribute at least 90% of its taxable income to shareholders each year to avoid corporate-level taxation.¹ These requirements allow REITs to operate similarly to mutual funds, offering investors consistent income and real estate exposure.

Publicly traded vs. non-traded REITs. 

While many REITs trade on public exchanges like the NYSE or Nasdaq, a substantial portion of the market consists of non-traded REITs—also known as non-exchange-traded REITs. These are registered with the SEC but aren’t listed on public exchanges.² Instead, shares are sold through broker-dealers or financial advisors during defined offering periods. Because they aren’t publicly traded, there’s no active secondary market for investors looking to sell. Liquidity is limited and typically comes through structured redemption programs (which often include restrictions) or through an eventual liquidity event like a sale, merger, or public listing, which can take five to 10 years.³ 

Without daily market pricing, investors rely on periodic valuations provided by the sponsor, often based on third-party appraisals. This structure offers less price transparency than public REITs.⁴ 

Key characteristics of non-traded REITs. 

Non-traded REITs come with a few defining features: limited liquidity, lagged valuations, and higher fees than their publicly traded counterparts.⁵ Shares are typically sold at a fixed offering price, usually $10 per share, even though the underlying real estate value can fluctuate. As a result, account statements might reflect that same purchase price for an extended time, even when the portfolio’s value has changed. Regulatory updates over the past several years have aimed to improve disclosure and help investors better understand what their shares are actually worth.⁶

Costs can be a significant consideration. Upfront fees— including selling commissions, dealer-manager fees, and offering expenses—can add up to over 10% of the offering price.⁷ In addition, ongoing management fees and propertylevel expenses reduce the net return to investors. 

Because of the illiquid structure and valuation challenges, nontraded REITs are typically positioned for clients who are seeking long-term exposure to real estate and are comfortable giving up short-term access to their capital in exchange for potential income and diversification benefits. 

Regulatory and compliance developments. 

Regulators have taken several steps to increase transparency and investor protections in the non-traded REIT space. One major shift came in 2016 with FINRA’s Regulatory Notice 15-02, which amended Rules 2310 and 2340. These rules now require that client statements reflect a “net investment” or “appraised value” per-share estimate, rather than defaulting to the initial offering price.⁸ This move aimed to give investors a more realistic picture of what their holdings are worth. 

Then came the SEC’s Regulation Best Interest (Reg BI), which took effect in June 2020. It raised the bar for broker-dealers by requiring that recommendations be in the client’s best interest, not just “suitable,” and that brokers avoid putting their own compensation ahead of the client’s needs.⁹ This is especially relevant when recommending complex and fee-heavy products like non-traded REITs. 

While the Department of Labor’s fiduciary rule was vacated in 2018, professionals working with retirement accounts should still stay on top of evolving fiduciary standards.¹⁰ Recommending illiquid, higher-risk investments demands heightened care, particularly when dealing with clients’ retirement assets.

Suitability and accreditation. 

Non-traded REITs aren’t for everyone. Because of their illiquidity, opaque pricing, and complex fee structures, these investments are generally considered appropriate only for certain investors.¹¹ Some offerings are limited to accredited investors under Regulation D, while others may include net worth or income thresholds. 

FINRA Rule 2111 requires that financial professionals conduct a thorough suitability analysis. Advisors need to confirm that the investment fits with the client’s financial picture, risk tolerance, liquidity needs, and time horizon.¹² Clear disclosures are essential—clients must understand that these investments come with the potential for loss of principal, may not be redeemable on demand, and may offer limited pricing transparency. Advisors should also maintain strong documentation of the rationale behind each recommendation to help meet compliance standards and protect the client’s best interest. 

Recent industry trends. 

Capital raising for non-traded REITs surged between 2013 and 2016, with annual fundraising often topping $20 billion. Since then, the pace has slowed, driven by regulatory changes, evolving investor preferences, and market shifts like rising interest rates. Many smaller sponsors have exited the space or merged with others, leaving a more concentrated group of larger, more institutional operators. 

At the same time, several older non-traded REITs have achieved liquidity through asset sales, mergers with listed REITs, or public listings. These developments have helped investors exit their positions but have also emphasized the importance of sponsor selection, asset quality, and exit planning.¹³ More recently, new product structures like NAV REITs—which use net asset value-based pricing and allow periodic redemptions— have gained traction in an effort to address historical concerns about transparency and liquidity.

Conclusion. 

Non-traded REITs can be a useful tool for clients seeking access to real estate investments, income potential, and portfolio diversification. But these benefits come with important trade-offs—namely, limited liquidity, higher fees, and less price transparency. These investments are best suited for clients with long-term horizons and sufficient liquidity elsewhere in their portfolios. 

Advisors have a critical role to play in helping clients understand the risks and rewards, conducting proper due diligence, and ensuring each investment recommendation is grounded in a thorough suitability analysis. A thoughtful, client-first approach will help ensure non-traded REITs are used effectively and responsibly within a broader portfolio strategy.

Important information 

This information is based on the views of, and provided by, SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company. This information should not be relied upon by the reader as research or investment advice or recommendations (unless SIMC has otherwise separately entered into a written agreement for the provision of investment advice regarding the subject matter of this material).