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Originally Posted by lukeh
NON traded REITs that invest in class A office space (no strip malls, vacation property...) . I have three of these and they pay 6, 6.5 and 7.5. There are also bond funds out there that are paying 7%. She can take the interest without having to sell any shares. Sure, the share price will move up and down (I'd say up over the long haul) but as long as it's the income she is after the fluctuation in the share price is meaningless. You can get 7% without having to look to the stock market or taking on an extreme amount of risk.
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I wouldn't say fluctuation in the share price is meaningless.
Commercial buildings, even Class A office space, are declining in value. So, while the REIT is still paying out 6%, the underlying asset value is falling. The decline is masked because the REIT is not traded, but it is happening.
How much of a decline? Well, one can use publicly traded office REITs as a start. SLG has fallen from $150 to $20, BXP from $120 to $40, etc. These are certainly larger declines than the actual values of the properties - much of the decline represents the REIT's diminished future growth and the risk to future payouts. But the non-traded REITs are surely declining in value too.
But what about that steady 6% income? Well, you give $1MM and ask me to pay you 6%/yr, no problem - I can do that for a long time,
as long as you don't mind me taking the money from your principal . . .
Eventually, if demand/supply for office space becomes weak enough, and the rents generated by those offices decline enough, the REIT will not be able to maintain the 6% income stream. Then the decline in asset value will be sadly evident.
I think before investing in a office REIT, traded or non-traded, you need to have a strong and analyzed view on the path of office building values. There is no free lunch.