By meeting these qualifications, a REIT qualifies as a "pass-through" entity. That means it doesn’t pay any corporate income taxes. The result is greater cash flow that it can pay out to investors in dividends.
What is a traded REIT?
A traded REIT trades on a public stock exchange, such as the New York Stock Exchange or NASDAQ. Traded REITs are highly liquid. Most large REITs see tens or hundreds of thousands of shares trade hands every market day.
In addition to liquidity, traded REITs are also open to investors of all types. All it takes is a brokerage account -- preferably with a low-cost online broker -- and the money to buy shares.
This is the way most individuals invest in real estate.
What is a non-traded REIT?
There are two kinds of REITs in this category: private REITs and public non-listed REITs (PNLRs).
Let’s start with private REITs. These differ from public REITs in very meaningful ways.
First, they are non-traded. That means they don’t offer shares anyone can buy and sell on a public exchange. Investments are made via private placements or direct solicitation of investors. Private REITs generally have stringent holding requirements. You might have five or more years with very limited or even no program in place for you to sell your stake. And it’s not unusual that if they do offer a redemption program, sales may be at a discount to the REIT’s value.
Second, only accredited investors are legally permitted to invest in these kinds of REITs. You must meet certain income and/or net wealth minimums to be accredited. Private REITs tend to focus on large, institutional investors like pension funds and organizations with large endowments.
Lastly, private REITs aren't required to register with the Securities Exchange Commission (SEC). That also means they don't file financial reports. This reduced oversight creates substantial risk for individual investors without the resources or expertise to understand and verify the suitability of any individual company.
The end result is this: Private REITs aren’t accessible to most investors, and wouldn’t make for an ideal investment even if they were.
Public non-listed REITs fall between publicly traded REITs and private REITs.
They don’t trade on stock exchanges, and they tend to have the same redemption limitations as private REITs. But they're registered with the SEC. So they get enhanced oversight and have publicly accessible financial filings that are audited by an approved accountancy firm. They're also often subject to oversight by state securities regulators.
Due to higher regulatory oversight, PNLRs are accessible to most individual investors.
The pros and cons of traded and non-traded REITs
Both traded and non-traded REITs can make excellent investments. But because of the differences in their trading and ownership rules, it’s important to understand their differences.