WC Varones

Don't lend your hand to raise no flag atop no ship of fools

John Maynard Keynes on non-traded REITs

I haven't written about non-traded REITs before, but they are one of the more widespread investment scams out there.  Typical REITs trade like stocks on an exchange and play a valuable role in asset allocation for most investors.  Non-traded REITs, on the other hand, are sold to unsuspecting small investors by their unscrupulous stock brokers, but can't be readily traded should the investor want to cash out.

The broker gets a huge commission, typically at least 5% and often even worse.  What the investor gets is ownership in a REIT that is immediately down by the amount of the commission.  Large "dividend" yields that sound good often turn out to be unsustainable, and dividends end up falling along with the portfolio value over time.

In addition to the unsustainable high dividend yields, risk-averse investors can be persuaded to buy non-traded REITs because they have stable values.  If they don't trade on an exchange, and don't have daily prices, there's no volatility!  Which is absurd, of course.  Just because you can't see the value of your holdings changing price every day doesn't mean that the underlying value isn't fluctuating just as much as an actively traded REIT.

So I found it interesting to see John Maynard Keynes making exactly this point way back in 1938, long before the modern non-traded REIT racket:
Some Bursars will buy without a tremor unquoted and unmarketable investments in real estate which, if they had a selling quotation for immediate cash available at each Audit, would turn their hair grey. The fact that you do not [know] how much its ready money quotation fluctuates does not, as is commonly supposed, make an investment a safe one.


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