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  • Writer's pictureJerry Ipsen, CFE, MBA

Exercise Caution Before Investing in REITs

The desire to invest is shared by millions looking to turn their money into more money. Real estate is the obvious choice for many because it provides them with something tangible like physical gold that they can see and touch. This contrasts with purchasing equities through public securities exchanges, which provides a more abstract version of ownership.

Non-traded REITs sought by some are not traded on any public securities exchanges, but rather are offered privately to investors until enough capital is raised to begin or continue operations. Because these products do not trade publicly, it is very hard for securities firms and regulatory agencies to monitor them making it a lot easier for securities brokers to misrepresent these investments as safe and lucrative.

While fraud can happen with any type of REIT, non-traded REITs are more susceptible due to the limited disclosures required for these investments. Over the years, many investors of non-traded REITs have found themselves as victims of fraud. The speculative nature of non-traded REITs is often misrepresented, undisclosed or even ignored. Registered investment advisors who are true fiduciaries view non-traded REITs as risky and often illiquid and classify them as highly unsuitable for several categories of investors.

Adding insult to injury, broker commissions for non-traded REITs can be as high as ten percent of the investor’s principal investment. When an investor’s principal investment is reduced by that much, it makes achieving long-term gains nearly impossible to realize, especially for those seeking positive returns. The high commissions along with up-front fees create an obvious conflict of interest especially when brokers recommend products, they know are unsuitable for certain investors.

Investors seeking a high degree of liquidity, and a steady income stream may want to consider publicly traded securities which are accompanied by the logistics of a free market in which to redeem investments. This means that investors can often exchange their shares and receive an amount of cash equal to what their shares are currently valued. This is not the case with non-traded REITs.

Ipsen Due Diligence works with investors and their attorneys who’ve found themselves in questionable circumstances due to the suspicious activity surrounding their investments.  Jerry Ipsen with his real estate experience is a Certified Fraud Examiner and a NASD (Series 7) trained securities professional.

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