A REIT (Real estate investment trust) is a tool for individual investors to gain access to commercial real estate that they might not otherwise be able to afford. REITs can be traded or non-traded, and either way, they may provide a passive way to invest in real estate.
The investment vehicle commenced in 1960, and REITs have continued their growth since inception. Because they are "pass-through" companies, federal tax is not levied at the corporate level if the REIT meets specific standards. Those stipulations include:
- At least 75 percent of the organization's income and 75 percent of its total assets must be in real estate or related activities.
- REITs must distribute a minimum of 90 percent of their taxable income to investors via dividends.
- Must have at least 100 shareholders.
- May not have fifty percent or more ownership concentrated in the hands of five or fewer investors.
REITs commonly own property in various commercial real estate classes, including multi-family housing, hospitality, health care, retail, office, industrial, and self-storage. Some maintain a diverse portfolio, while others specialize.
What Are the Different Types of REIT?
Some REITs focus on owning and pursuing income from real estate assets and are typically called equity REITs. In contrast, others buy the debt or mortgage obligations that secure property and may be referred to as mortgage REITs.
REITs can be traded or non-traded. Either way, the investment must adhere to the standards noted above to gain corporate tax advantages. The difference is in the acquisition, disposition, and as a result, the liquidity. A traded REIT is a security that can be bought and sold on major exchanges. Due to that accessibility, traded REITs are highly liquid and have generally accepted values. As a result, an interested investor can buy one share just as quickly as they can acquire one share of any other publicly traded stock and sell it at will. In contrast, a non-traded REIT is not publicly traded and is not available as stock. That fact makes these investments illiquid—which in brief means that an investor may not be able to sell it when they want or need to do so.
The Securities and Exchange Commission cautions investors to seek professional guidance when investing in non-traded REITs and carefully research the opportunity before committing. In addition, the SEC notes that fees may be higher than those for publicly traded investments and that minimum participation amounts may also be higher. Still, there is no requirement that investors have accredited status since these REITs do file reports with the SEC.
What About Private REITs?
Private or private-placement REITs are unlisted and untraded but also exempt from SEC registration and reporting. That lack of disclosure makes it virtually impossible for investors to gain any reliable information about the potential value of the investment. As a result, these can only be distributed to accredited investors, defined as individuals with a net worth greater than one million dollars, not including a primary residence, or who meet specific annual income requirements.
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. 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
