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- Introduction to Investing - Getting Going - Five Questions to Ask Before You Invest
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Real Estate Investment Trusts (REITs)

What are REITs?

Real estate financial investment trusts (" REITs") allow people to invest in massive, income-producing real estate. A REIT is a business that owns and usually runs income-producing property or related properties. These might consist of office complex, going shopping malls, apartment or condos, hotels, resorts, self-storage centers, 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 mainly to run them as part of its own financial investment portfolio.

Why would somebody purchase REITs?

REITs provide a method for specific investors to earn a share of the income produced through commercial realty ownership - without in fact needing to go out and purchase commercial 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 publicly traded REITs. Others might be signed up with the SEC however are not openly traded. These are called non- traded REITs (likewise called non-exchange traded REITs). This is among the most crucial distinctions amongst the different kinds of REITs. Before purchasing a REIT, you must understand whether it is publicly traded, and how this could impact the benefits and risks to you.

What are the advantages and risks of REITs?

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

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

Lack of Liquidity: Non-traded REITs are illiquid investments. They normally can not be offered easily on the open market. If you require to offer an asset 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 an openly traded REIT is easily accessible, it can be difficult to identify the worth of a share of a non-traded REIT. Non-traded REITs normally do not offer a quote of their value per share till 18 months after their offering closes. This may be years after you have made your financial investment. As a result, for a significant 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 may be drawn in 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 circulations in excess of their funds from operations. To do so, they might use offering earnings and loanings. This practice, which is typically not used by openly traded REITs, reduces the worth of the shares and the cash offered to the company to acquire extra properties. Conflicts of Interest: Non-traded REITs generally have an external supervisor instead of their own staff members. This can cause prospective conflicts of interests with investors. For example, the REIT may pay the external supervisor significant fees based on the quantity of residential or commercial property acquisitions and properties under management. These cost rewards may not necessarily align with the interests of investors.

How to purchase and offer REITs

You can buy a publicly traded REIT, which is listed on a significant stock exchange, by acquiring shares through a broker. You can acquire shares of a non-traded REIT through a broker that takes part in the non-traded REIT's offering. You can likewise buy shares in a REIT mutual fund or REIT exchange-traded fund.

Understanding costs and taxes

Publicly traded REITs can be purchased through a broker. Generally, you can acquire the typical stock, chosen stock, or financial obligation security of an openly traded REIT. Brokerage costs will use.

Non-traded REITs are generally sold by a broker or monetary adviser. Non-traded REITs normally have high up-front costs. Sales commissions and upfront offering charges generally total approximately 9 to 10 percent of the investment. These costs lower the value of the financial investment by a considerable amount.

Special Tax Considerations

Most REITS pay at least 100 percent of their gross income to their shareholders. 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 normally are treated as common income and are not entitled to the lowered tax rates on other types of corporate dividends. Consider consulting your tax advisor before purchasing REITs.

Avoiding fraud

Be careful of any individual who tries to offer REITs that are not registered with the SEC.

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

You must also examine out the broker or financial investment adviser who suggests acquiring a REIT. To discover how to do so, please see Working with Brokers and Investment Advisers.

Additional 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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