Real estate investing is one of the most diversified investment fields there is. If you’ve made the decision to start pursuing real estate investing, you can choose between fix-and-flip properties, owning and managing your own apartment complex, renting out your current residence while downsizing to something more manageable, and any other number of options. However, for investors who are seeking truly passive income, real estate investing provides its own list of options. While real estate syndicates and crowdfunding options are plentiful, some investors prefer REITs. Understanding what REITs are and whether or not they give you the access that you need to your money can help you make a more informed decision about your own investment strategy.
What Are REITs?
REIT stands for real estate investment trust. These trusts are essentially companies that own, operate, or even finance properties designed to produce income. In order to qualify as a REIT, a company needs to meet certain conditions including investing at least 75% of its total assets in real estate and pay at least 90% of its taxable income in the form of shareholder dividends each year. REITs are appealing to investors because they allow them to diversify their portfolio through adding potential income-producing commercial real estate without having to deal with the process of finding, purchasing, managing, or selling a property on their own. Investors can pursue both income (via dividends) as well as capital appreciation by investing in REITs.
What Determines an Asset’s Liquidity Status?
In order to be considered a liquid asset, an asset must be able to be easily converted into cash. For instance, if you’ve ever invested in the stock market, you’ve invested in liquid assets. When you purchase shares of a publicly traded company, you can then sell those shares at your own discretion. When those shares are sold, you receive cash based on the number of shares sold and their current value. Additionally, cash on hand is considered a liquid asset, as it does not have to be sold to have value.
Non-liquid assets (also referred to as illiquid) are assets that cannot be quickly or easily converted to cash. Examples of illiquid assets include homes, buildings, art, collectables, and other potentially profitable assets that require some work to sell.
Are REITs Considered Liquid?
Since an investment in a REIT is an investment in real estate, many investors are curious about whether their investment is considered liquid. Obviously, there’s nothing wrong with having illiquid assets in your portfolio, but many investors like to ensure that they have enough liquid assets on hand. This abundance of liquid assets ensures that they can quickly access the cash they need in the event of a financial shift, or that they could easily unload those assets in the event of a market downturn.
Fortunately, many publicly traded REITs provide liquidity for investors. Since shares in a REIT are bought and sold in the same way that shares in the stock market are offered, REIT shares may be easily liquidated, making them a liquid asset. Being able to hold real estate investments may be appealing to investors, thanks largely to the status of real estate as a non-correlated asset class. However, being able to quickly access cash or change investment strategies makes REITs an option for liquidity.
Investing in a REIT is an opportunity for investors to get real estate in their portfolio without having to tie up their money for extended periods of time, waiting on a property to sell, or for a commercial property to begin generating profits. Instead, REITs are designed to provide real estate investors with an opportunity to quickly cash out and move on to their next investment.
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. It should also not be construed as advice meeting the particular investment needs of any investor. 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. 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.
