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Real Estate Investment Trusts (REITs)

What are REITs?

Real estate investment trusts (" REITs") allow people to buy massive, income-producing real estate. A REIT is a business that owns and generally operates income-producing genuine estate or related assets. These might consist of office complex, going shopping malls, apartment or condos, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Unlike other real estate companies, a REIT does not develop property residential or commercial properties to resell them. Instead, a REIT purchases and establishes residential or commercial properties primarily to operate them as part of its own financial investment portfolio.

Why would someone invest in REITs?

REITs provide a method for individual financiers to earn a share of the earnings produced through business real estate ownership - without in fact needing to go out and buy business property.

What kinds of REITs exist?

Many REITs are signed up with the SEC and are publicly traded on a stock exchange. These are referred to as openly traded REITs. Others might be signed up with the SEC but are not publicly traded. These are known as non- traded REITs (likewise called non-exchange traded REITs). This is among the most essential differences among the different sort of REITs. Before purchasing a REIT, you need to understand whether or not it is publicly traded, and how this might affect the benefits and risks to you.

What are the advantages and dangers of REITs?

REITs provide a method to consist of property in one's investment portfolio. Additionally, some REITs may use higher dividend yields than some other financial investments.

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

Lack of Liquidity: Non-traded REITs are illiquid financial investments. They generally can not be offered readily on the open market. If you need to offer a property to raise money rapidly, you might not have the ability to do so with shares of a non-traded REIT. Share Value Transparency: While the marketplace price of a publicly traded REIT is readily available, it can be difficult to figure out the value of a share of a non-traded REIT. Non-traded REITs typically do not supply a quote of their value per share till 18 months after their offering closes. This may be years after you have made your investment. As an outcome, for a considerable period you may be unable to evaluate the value of your non-traded REIT financial investment and its volatility. Distributions May Be Paid from Offering Proceeds and Borrowings: Investors may be brought in to non-traded REITs by their fairly high dividend yields compared to those of openly traded REITs. Unlike openly traded REITs, however, non-traded REITs regularly pay distributions in excess of their funds from operations. To do so, they may use providing earnings and borrowings. This practice, which is normally not used by openly traded REITs, decreases the value of the shares and the cash readily available to the business to buy extra assets. Conflicts of Interest: Non-traded REITs normally have an external supervisor instead of their own workers. This can cause possible disputes of interests with investors. For example, the REIT may pay the external supervisor considerable costs based upon the amount of residential or commercial property acquisitions and assets under management. These charge rewards may not always align with the interests of investors.

How to buy and sell REITs

You can purchase an openly traded REIT, which is noted on a major stock exchange, by acquiring 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 likewise purchase shares in a REIT mutual fund or REIT exchange-traded fund.

Understanding charges and taxes

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

Non-traded REITs are usually sold by a broker or financial advisor. Non-traded REITs normally have high up-front costs. Sales commissions and in advance offering fees generally amount to around 9 to 10 percent of the investment. These expenses lower the value of the financial investment by a substantial amount.

Special Tax Considerations

Most REITS pay at least 100 percent of their taxable income to their investors. The shareholders of a REIT are responsible for paying taxes on the dividends and any capital gains they get in connection with their investment in the REIT. Dividends paid by REITs usually are dealt with as normal income and are not entitled to the lowered tax rates on other kinds of business dividends. Consider consulting your tax advisor before investing in REITs.

Avoiding fraud

Watch out for anybody who tries to sell REITs that are not signed up with the SEC.

You can verify the registration of both openly traded and non-traded REITs through the SEC's EDGAR system. You can likewise use EDGAR to evaluate a REIT's annual and quarterly reports in addition to any offering prospectus. For more on how to use EDGAR, please visit Research Public Companies.

You need to likewise take a look at the broker or financial investment consultant who advises acquiring a REIT. To learn how to do so, please go to Working with Brokers and Investment Advisers.

Additional info

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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