Real estate investors can choose to buy investment properties directly or place their money into a real estate fund. If you're interested in real estate investing but want to add even more diversification to your portfolio, you could also consider investing in a real estate investment trust (REIT). These are companies that are designed specifically to own and operate real estate that generates income. While REITs are often considered alternative investments, you may be wondering if this type of investment is redeemable. Here's a closer look at what REITs are and if they can be redeemed.
What Is a Real Estate Investment Trust?
A REIT is a type of company that finances, owns, or operates real estate properties that produce income. A REIT is structured almost exactly like a mutual fund, which means that the capital the REIT uses is pooled together from many individual investors. These investors are then able to obtain dividends from their investments without needing to go through the hassle of purchasing or managing their own properties.
If you decide to invest in a REIT, the returns you receive come from standard income streams when tenants make their monthly rent payments as well as from capital appreciation. The majority of REITs are traded publicly on the stock market, which means that they are highly liquid compared to other real estate investments. It's possible for a REIT to invest in most property types, including:
- Apartment buildings
- Data centers
- Cell towers
- Retail centers
- Medical facilities
What Are Redeemable Investments?
A redeemable investment involves a fixed-income security being repaid on or at some point before the investment's maturity date. An example of a redeemable investment is a mutual fund. If you invest in a real estate mutual fund, you can request a redemption that covers part or all of your shares.
Any type of bond can be redeemed on the maturity date or before this date arrives. In the event that the bond is redeemed when maturity occurs, the investor will receive the par value of the bond, which is the value when the bond was initially issued. In order for an investor to redeem a mutual fund, they must ask their fund manager to begin this process, after which the funds will be distributed to them within a set period of time.
The main reason to make a redeemable investment is to be able to claim your investment before the investment matures. Otherwise, you may be tasked with waiting until the maturity date, at which point the investment could be worth lower than you anticipated.
Does a REIT Qualify as Redeemable?
While a REIT is considerably more liquid than other real estate investments, the REIT shares that you will gain from your investment can only be traded like any other stock, which means that these shares will need to be sold on a stock exchange. Most REITs don't qualify as redeemable. REITs as described in this article, issue common stock, which can be bought and sold on stock exchanges and are considered not redeemable. To note, some REITs can issue preferred stock, which can be redeemed by the issuing entity. If you decide to sell your REIT shares on the market, you must do so at the market price.
REITs are among some of the alternative investments that you can invest in. Investing in a REIT can provide you with potential liquidity, transparency, and diversification, as well as the potential for cash flow via dividends.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. There is no guarantee you will receive any income. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.