What are REITs?
real estate of the realm investment trusts ( “ REITs ” ) allow individuals to invest in large-scale, income-producing real number estate of the realm. A REIT is a caller that owns and typically operates income-producing real estate or related assets. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Unlike early real estate companies, a REIT does not develop real estate of the realm properties to resell them. alternatively, a REIT bribe and develops properties chiefly to operate them as separate of its own investment portfolio .
Why would somebody invest in REITs?
REITs provide a means for individual investors to earn a share of the income produced through commercial real estate of the realm ownership – without actually having to go out and buy commercial real estate of the realm .
What types of REITs are there?
many REITs are registered with the SEC and are publicly traded on a stock commute. These are known as publicly traded REITs. Others may be registered with the SEC but are not publicly traded. These are known as non- traded REITs ( besides known as non-exchange traded REITs ). This is one of the most significant distinctions among the respective kinds of REITs. Before investing in a REIT, you should understand whether or not it is publicly traded, and how this could affect the benefits and risks to you .
What are the benefits and risks of REITs?
REITs offer a means to include real estate of the realm in one ’ south investing portfolio. Additionally, some REITs may offer higher dividend yields than some other investments.
But there are some risks, particularly with non-exchange trade REITs. Because they do not trade on a livestock exchange, non-traded REITs involve particular risks :
- Lack of Liquidity: Non-traded REITs are illiquid investments. They generally cannot be sold readily on the open market. If you need to sell an asset to raise money quickly, you may not be able to do so with shares of a non-traded REIT.
- Share Value Transparency: While the market price of a publicly traded REIT is readily accessible, it can be difficult to determine the value of a share of a non-traded REIT. Non-traded REITs typically do not provide an estimate of their value per share until 18 months after their offering closes. This may be years after you have made your investment. As a result, for a significant time period you may be unable to assess the value of your non-traded REIT investment and its volatility.
- Distributions May Be Paid from Offering Proceeds and Borrowings: Investors may be attracted to non-traded REITs by their relatively high dividend yields compared to those of publicly traded REITs. Unlike publicly traded REITs, however, non-traded REITs frequently pay distributions in excess of their funds from operations. To do so, they may use offering proceeds and borrowings. This practice, which is typically not used by publicly traded REITs, reduces the value of the shares and the cash available to the company to purchase additional assets.
- Conflicts of Interest: Non-traded REITs typically have an external manager instead of their own employees. This can lead to potential conflicts of interests with shareholders. For example, the REIT may pay the external manager significant fees based on the amount of property acquisitions and assets under management. These fee incentives may not necessarily align with the interests of shareholders.
How to buy and sell REITs
You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a broker. You can purchase shares of a non-traded REIT through a broke that participates in the non-traded REIT ’ second offer. You can besides purchase shares in a REIT reciprocal fund or REIT exchange-traded fund .
Understanding fees and taxes
Publicly traded REITs can be purchased through a broker. by and large, you can purchase the park standard, prefer livestock, or debt security of a publicly traded REIT. brokerage fees will apply .
Non-traded REITs are typically sold by a agent or fiscal adviser. Non-traded REITs generally have high up-front fees. Sales commissions and upfront offer fees normally total approximately 9 to 10 percentage of the investing. These costs lower the respect of the investment by a significant measure.
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Special Tax Considerations
Most real estate investment trust pay out at least 100 percentage of their taxable income to their shareholders. The shareholders of a REIT are creditworthy for paying taxes on the dividends and any capital gains they receive in connection with their investment in the REIT. Dividends paid by REITs by and large are treated as ordinary income and are not entitled to the reduce tax rates on early types of corporate dividends. Consider consulting your tax adviser before investing in REITs .
Be leery of any person who attempts to sell REITs that are not registered with the SEC .
You can verify the registration of both publicly traded and non-traded REITs through the SEC ’ s EDGAR system. You can besides use EDGAR to review a REIT ’ s annual and quarterly reports deoxyadenosine monophosphate well as any offer course catalog. For more on how to use EDGAR, please visit Research Public Companies.
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You should besides check out the agent or investment adviser who recommends purchasing a REIT. To learn how to do so, please visit Working with Brokers and Investment Advisers .
SEC Investor Bulletin : actual Estate Investment Trusts ( REITs )
FINRA Investor Alert : populace Non-Traded REITs – Perform a Careful Review Before Investing