Q A new financial adviser is recommending a private real estate investment trust (REIT) for retirement investment purposes, citing that the money won't be tied to the stock market. It seems that private REITs have done well. What are the predictions?
JEANINE, MINNEAPOLIS
A Investor concerns are growing. Thanks to a brutal combination of a recession and the credit crunch, commercial real estate values have been getting hit hard. Standard & Poor's composite real estate investment trust index is down about 58 percent over the past year, much of that since the end of September.
REITs invest in all kinds of properties. Ask many questions. In what market sector does the REIT invest? What's management's experience, especially in tough times?
I'm generally skeptical of private REITs, also known as untraded REITs, non-traded REITs, public unlisted REITs and non-publicly traded REITs. Public and private REITs pool investor cash to buy commercial real estate, pay at least 90 percent of their incomes in dividends and register with the Securities and Exchange Commission.
But an untraded REIT isn't listed on any stock exchange. The price of a share is set by the sponsor. It doesn't fluctuate. A private REIT typically lasts for a set period, say 10 to 12 years. Investors then cash in through an initial public offering, a merger, or liquidation.
Many private REITs charge a cornucopia of fees. So take a close look, and be sure you are comfortable that these are essentially "illiquid" investments. While getting in for as little as $1,000 is easy, sponsors typically make it tough to withdraw money. Redemptions usually are limited to no more than 3 percent a year, and sponsors can suspend redemptions at any time.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org, or to kaching@startribune.com. Put "Your Money" in the subject line.