Investing in Real Estate Investment Trusts (REITs): Unlikely for 15% Returns

Real Estate Investment Trusts (REITs) are often marketed as an attractive investment option due to their potential for steady income through dividends. However, the reality is quite different, especially when highly advertised returns of 15% or more are concerned. This article delves into why achieving such returns from REITs like Oak Tree is very unlikely, highlighting the risks, fees, and other factors involved.

Typical Returns from REITs

Typically, REITs do not offer the kind of returns that are touted by various marketing campaigns. For instance, take the case of Oak Tree Capital Group LLC, where the annual dividend yield is approximately 7.75%. This is significantly lower than the 15% return that may seem alluring at first glance.

Studies have shown that achieving IRR (Internal Rate of Return) of 15-20% is more likely through specific real estate investments or specialized funds rather than through broad market REITs. IRR is the gross return relative to the original investment, providing a measure of the average annual return over the investment period. To reach such returns, investors usually need to invest directly in specific real estate projects or funds rather than in traditional REITs.

The Case of Non-Traded REITs

A unique twist on the typical REIT investment is the non-traded fund. While non-traded REITs may offer higher returns, they also come with significant risks and fees. These non-traded funds don't have the same liquidity as publicly traded REITs, making it difficult to sell your shares if you need to extract capital.

The offering details for a non-traded REIT can be quite complex. For example, the offering includes four classes of common stock: Class T, Class S, Class D, and Class I. Each class has different pricing structures and fees:

Class T Shares: Priced at $10.35 with a 3.0% selling commission, 0.5% dealer manager fee, and an annual 0.85% stockholder servicing fee (0.65% advisor fee and 0.20% dealer fee). Class S Shares: Priced at $10.35 with a 3.5% selling commission, no dealer manager fee, and an annual 0.85% stockholder servicing fee. Class D Shares: Priced at $10.05 with a 0.5% selling commission, no dealer manager fee, and an annual 0.25% stockholder servicing fee. Class I Shares: Priced at $10.00 with no selling commission, dealer manager fees, or stockholder servicing fees.

Notably, the fees and commissions for the offering can exceed 8.75%, which is significantly higher than what you would typically see in publicly traded REITs. These fees can drastically reduce the net returns from your investment, making it very unlikely that you would achieve a return of 15% or more.

Risks and Considerations

In addition to the high fees and commissions, non-traded REITs also come with other risks:

Liquidity Risks: Non-traded REITs are less liquid than publicly traded REITs. You may not be able to sell your shares easily, especially if market conditions are unfavorable. Complexity of Fees: Understanding and managing the various fees associated with non-traded REITs can be challenging. These fees not only reduce your returns but also complicate the overall investment structure. Explicit KNOW THIS: The offerings from non-traded REITs can be highly misleading. It is crucial to thoroughly research and understand any investment before committing funds.

Furthermore, tax laws and regulations can significantly impact your returns. You should be aware of how each investment is taxed, whether as ordinary income or capital gains. One of the advantages of investing in smaller funds or specific assets is the ability to roll your proceeds into a similar investment through a 1031 exchange, thereby deferring capital gains taxes.

Conclusion

While real estate can offer the potential for substantial returns, achieving a 15% return through REITs, especially non-traded ones, is highly unlikely. The inherent risks, fees, and complex structures can easily offset any promised returns. If you are interested in investing in real estate, it is advisable to explore more specific opportunities or consult with a financial advisor to understand the true potential and risks involved.

Keywords: real estate investment trusts, REITs, Oak Tree, investment returns