Perpetual-Life Non-Traded REITs: Four Things Investors Should Know
Companies with good track records oversee the largest perpetual-life non-traded REITs, but there are some structural concerns about the funds to be aware of.


As co-founder of real estate private equity investment firm Hamilton Point Investments, I believe the current perpetual non-traded REIT (real estate investment trust) structure creates certain concerns that investors should be aware of and take into consideration.
Non-traded REITs proliferated in the decade after the real estate crash of 2008-09. Individual investors placed money with these groups largely through independent financial advisers and, in return, were told to expect distributions for a number of years after which the REIT would pursue liquidation of the portfolio or list to go public. The focus and energy were on raising equity, with investment and operations seemingly an afterthought. Their results were poor, underperforming public REITs and direct, private investments, with numerous examples of complete losses of investment.
After the collapse of American Realty Capital in 2014, other failures and accompanying arbitration awards led to a dramatic decline in non-traded REIT investment. Several years later, though, a number of large publicly traded financial firms entered the space, raising huge amounts of equity through the name-brand wirehouses instead of independent broker-dealers. A twist from the previous non-traded REITs is that this new structure is perpetual, with no planned exit.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
While these newer sponsors differ in that they are experienced real estate investment companies with the institutional knowledge, infrastructure and track record to be successful, there are considerations investors in these perpetual-life non-traded REITs should be aware of.
Issues that investors need to know about
Share valuation issues. Current non-traded REITs offer monthly or quarterly share valuations, which are used to calculate both the price at which new investors come in and at which existing investors may endeavor to redeem and cash out. The share transaction price, or net asset value (NAV) per share, is solely determined by the company, which employs third-party valuation advisers, but the ultimate NAV is at the sole discretion of the company and is portrayed as exact.
NAV calculations are not exact and can be far from. Take for example a property declared to be worth $100 million. This is an approximation. No matter how experienced and smart the REIT principals are, that $100 million really means somewhere between, say, $95 million and $105 million. Leverage, in turn, magnifies that disparity. If the above property has 50% leverage, the equity is $50 million. If the ultimate value of the property is $95 million, that equity is worth $45 million. At $105 million, the equity is $55 million. This roughly 10% swing in property value, leveraged, translates to closer to a 20% swing in share equity value. NAV calculations are a good guess of what the share price should be, but they are far from perfect.
Legacy assets acquired at market peak pricing. When investing in a perpetual-life non-traded REIT, one is not investing in the real estate market as it sits now. A good portion of the real estate may have been purchased several years ago, which currently coincides with the peak of this last market pricing run-up. Some non-traded REITs have been slow to adjust their valuations — where overall commercial real estate values have fallen around 20% since November 2022, some non-traded REITs have stated much lower declines, perhaps materially light even taking into account different property-type allocations.
Current investors in a perpetual-life vehicle may believe they are getting into the market at this attractive time, taking advantage of the pricing correction that occurred over the last two years. But with many of those properties purchased at 2021 and 2022 market peak pricing, the assets are likely worth less now than what was paid for them.
While hotels and student housing bought in 2021, for example, may have been good investments as the COVID pandemic beat those property types down, conventional apartments and industrial/warehouses were likely much less so. There could be a good reason why the REIT’s legacy investments are currently attractive. Just don’t take the often shared “it’s better real estate” or “we’re really good managers” as a sufficient answer.
Questionable liquidity. Liquidity (the ability to get one’s investment capital back) in newer perpetual-life non-traded REITs is touted as sort of “no problem,” with passing reference to quarterly liquidity up to some percentage of assets. However, as we’ve seen over the last year, the ability to get your money back and the price-determining mechanism for such are not ideal.
While liquidity is offered, in practice an investor essentially must apply for an equity redemption, which could be approved fully, in part or not at all. Potential investor need for liquidity aside, this removes an important ability of investors to react quickly to changing market conditions, up or down, or changing views of the sponsor.
Dilutive nature of redemptions. Redemptions if met often strain the finances of the non-traded REIT to the detriment of remaining investors. The older REITs, which underperformed, at least had a stated target of company liquidation or public listing after some period. With today’s perpetual non-traded REITs, you get liquidity at the REIT’s sole discretion.
Often the REITs do not have the cash to perform on redemptions, requiring dilutive repayment of current equity with capital coming in from new investors. Note there is a cost of new equity in the form of commissions to financial advisers, so the net new cash to the REIT will always be less than the amount of cash redeemed.
Another way REITs handle redemptions may include sales of assets into poor market conditions or placing of new debt on properties at high interest rates.
None of these equity redemption methods is helpful to the remaining shareholders.
Conclusion
The major sponsors of today’s largest perpetual-life non-traded REITs are generally successful groups with decades of experience successfully managing institutional equity in closed-end real estate funds. They’ve got the institutional capabilities needed for success and strong track records. However, the four structural concerns noted above regarding perpetual-life non-traded REITs are only just now being tested, and the jury is out on how well it will go.
Related Content
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Matthew A. Sharp is co-founder and Managing Principal of Hamilton Point Investments LLC, a real estate private-equity investment firm that enables accredited individual investors to diversify their investment portfolios through institutional-quality, professionally managed real estate investments. Prior to forming the company, Mr. Sharp was Director of CMBS Origination at ABN AMRO Bank, N.V., and before that Mr. Sharp was a CMBS analyst at Standard and Poor’s.
-
April RMD? Five Tax Strategies to Manage Your 2025 Income
Taxable Income The April 1, 2025, deadline for required minimum distributions (RMDs) is fast approaching for retirees who turned 73 in 2024.
By Kelley R. Taylor Last updated
-
Rising AI Demand Stokes Undersea Investments
The Kiplinger Letter As demand soars for AI, there’s a need to transport huge amounts of data across oceans. Tech giants have big plans for new submarine cables, including the longest ever.
By John Miley Published
-
The Three Biggest Fears Keeping Retirees Up at Night
Here are the steps you can take to put those fears to rest and retire with confidence so you can relax and enjoy the life you've planned.
By Pam Krueger Published
-
What Can a Donor-Advised Fund Do for You? (A Lot)
DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
By Julia Chu Published
-
Estate Planning When You Have International Assets
Estate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
By Kelsey M. Simasko, Esq. Published
-
Three Essential Estate Planning Steps to Protect Your Nest Egg
After dedicating years to building your wealth and securing your future, make sure your assets are protected and your loved ones are provided for in the future.
By Nicole Farbo, CFP® Published
-
Is Chasing the American Dream Ruining Your Financial Life?
Too many people focus on visible affluence as a marker of success. Here's how to avoid succumbing to the pressure and driving yourself into debt.
By Anthony Martin Published
-
Retiring With a Pension? Four Things to Know
The road to a secure retirement is slightly more intricate for people with pensions. Here are four key issues to consider to make the most out of yours.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
How to Teach Your Kids About the Tax Facts of Life
Taxes are unavoidable, so it's important to teach children what to expect. Also, does your child need to file a tax return for 2024? Find out here.
By Neale Godfrey, Financial Literacy Expert Published
-
Revocable Living Trusts: The Good, the Bad and the Ugly
People are conditioned to believe they should avoid probate at all costs, but when compared with living trusts, probate could be a smart choice for some folks.
By Charles A. Borek, JD, MBA, CPA Published