Nontraded REITs: Weighing the risks, rewards of a high-yield alternative asset
As an alternative asset class, nontraded REITs also offer a low correlation with traditional asset classes, which can help diversify one's portfolio and limit volatility.
Green Street Advisors states on its website that "publicly traded REITs remain superior for almost all investors." But Allaire at Robert A. Stanger noted that the biggest pension funds own both traded real estate and nontraded real estate.
"Investors can do both, as well, but they should always remember diversification," he said. "Don't put too much of your investment into illiquid products and make sure you don't need that money while it's tied up."
His firm recommends investors limit their exposure to income-producing real estate investments to between 5 percent and 10 percent of their overall portfolio.
Nontraded REITS may offer better returns than fixed income products and even their traditional REIT counterparts, but they also come with some serious downside risks.
(Read more: Individual investors have 'alternative' options)
According to FINRA, yield-hungry investors who are willing to bear the risks of illiquidity and higher fees should thoroughly investigate any REIT they plan to buy, including the experience level of the management firm.
"You should consider the front-end cost relative to the sales costs you would incur to buy and sell other securities during the same holding period as the life of the REIT," FINRA stated in its advisory. "You may also want to consider how much share price appreciation and distributions you will need to receive to overcome these front-end charges."
To minimize volatility, Allaire added, average investors should opt for nontraded REITs that encompass multiple property types across a diverse geographic region, rather than those that invest more narrowly in a single segment of the market.
—By Shelly K. Schwartz, Special to CNBC.com