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Real Estate Investment Trusts (REITs)

What are REITs?

Realty financial investment trusts (" REITs") enable people to invest in massive, income-producing genuine estate. A REIT is a business that owns and typically operates income-producing real estate or associated possessions. These might include workplace structures, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Unlike other property business, a REIT does not develop property residential or commercial properties to resell them. Instead, a REIT buys and establishes residential or commercial properties mostly to operate them as part of its own investment portfolio.

Why would someone purchase REITs?

REITs offer a method for private investors to make a share of the earnings produced through industrial realty ownership - without really needing to go out and purchase business real estate.

What types of REITs exist?

Many REITs are registered with the SEC and are openly traded on a stock market. These are referred to as openly traded REITs. Others may be signed up with the SEC but are not openly traded. These are called non- traded REITs (likewise known as non-exchange traded REITs). This is one of the most important distinctions among the various kinds of REITs. Before buying a REIT, you need to understand whether it is publicly traded, and how this could affect the advantages and dangers to you.

What are the benefits and risks of REITs?

REITs provide a way to include property in one's investment portfolio. Additionally, some REITs may use greater dividend yields than some other financial investments.

But there are some risks, particularly with non-exchange traded REITs. Because they do not trade on a stock market, non-traded REITs include unique threats:

Lack of Liquidity: Non-traded REITs are illiquid investments. They normally can not be offered readily on the free market. If you require to sell an asset to raise money rapidly, you may not have the ability to do so with shares of a non-traded REIT. Share Value Transparency: While the marketplace rate of an openly traded REIT is easily available, it can be hard to identify the value of a share of a non-traded REIT. Non-traded REITs typically do not provide a quote of their value per share till 18 months after their offering closes. This might be years after you have actually made your financial investment. As an outcome, for a considerable period you may be not able to evaluate the value of your non-traded REIT investment and its volatility. Distributions May Be Paid from Offering Proceeds and Borrowings: Investors might be brought in to non-traded REITs by their relatively high dividend yields compared to those of publicly traded REITs. Unlike openly traded REITs, nevertheless, non-traded REITs often pay distributions in excess of their funds from operations. To do so, they might use providing earnings and loanings. This practice, which is usually not utilized by openly traded REITs, minimizes the value of the shares and the cash readily available to the business to buy additional possessions. Conflicts of Interest: Non-traded REITs normally have an external supervisor rather of their own staff members. This can cause prospective disputes of interests with shareholders. For instance, the REIT might pay the external manager significant fees based on the quantity of residential or commercial property acquisitions and assets under management. These charge incentives might not always line up with the interests of shareholders.

How to purchase and offer REITs

You can invest in a publicly traded REIT, which is listed on a major stock market, by buying shares through a broker. You can purchase shares of a non-traded REIT through a broker that takes part in the non-traded REIT's offering. You can also purchase shares in a REIT shared fund or REIT exchange-traded fund.

Understanding costs and taxes

Publicly traded REITs can be purchased through a broker. Generally, you can purchase the typical stock, preferred stock, or debt security of an openly traded REIT. Brokerage fees will apply.

Non-traded REITs are normally offered by a broker or financial consultant. Non-traded REITs generally have high up-front costs. Sales commissions and upfront offering fees generally amount to around 9 to 10 percent of the financial investment. These expenses lower the value of the investment by a considerable quantity.

Special Tax Considerations

Most REITS pay at least 100 percent of their taxable income to their investors. The investors of a REIT are accountable for paying taxes on the dividends and any capital gains they receive in connection with their financial investment in the REIT. Dividends paid by REITs typically are dealt with as normal income and are not entitled to the decreased tax rates on other types of corporate dividends. Consider consulting your tax advisor before buying REITs.

Avoiding scams

Watch out for any individual who tries to sell REITs that are not registered with the SEC.

You can validate the registration of both openly traded and non-traded REITs through the SEC's EDGAR system. You can also utilize EDGAR to review a REIT's annual and quarterly reports as well as any offering prospectus. For more on how to utilize EDGAR, please check out Research Public Companies.

You should also examine out the broker or investment advisor who recommends purchasing a REIT. To learn how to do so, please see Working with Brokers and Investment Advisers.

information

SEC Investor Bulletin: Real Estate Investment Trusts (REITs)

FINRA Investor Alert: Public Non-Traded REITs - Perform a Careful Review Before Investing

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