Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) invest in a pool of commercial or residential real estate investments or loans secured by Real Estate. Some REITs also act as property managers for property purchased within the REIT. REIT’s can be structured around an asset class such as: Multi-Tenant Office Buildings, Warehouses, or Multi-Family Buildings. To qualify as a REIT, a company must distribute at least 90% of its taxable income to shareholders.
Disclaimer: Investing in real estate and real estate investment trusts (REITs) is not suitable for all investors and involves special risks, such as illiquidity and limitations on the share redemption plan, demand for real property; changes in supply and demand for real property; change in law; tenant turnover or defaults; loss of investment; competition; casualty losses; use of leverage; real estate values may fluctuate based on economic, environmental and other factors. There is no assurance that the investment objectives of any real estate program will be obtained.
Why should someone invest in REITs? What advantages can REITs potentially offer investors?
REITs offer the distinct advantage of greater diversification through investing in a portfolio of properties rather than a single property. They also provide management by experienced real estate professionals. REITs are designed to provide investors with steady income in the form of monthly or quarterly dividends, as well as growth potential in the appreciation of the properties owned by the REIT.
REITs may also help investors diversify their assets and overall portfolio allocation. While most investors have substantial holdings of stocks, bonds and mutual funds, for many investors, real estate is overlooked. Many investors feel that in order to invest in real estate, they must have substantial amounts of capital, assume new debt and loans and be experienced at managing real estate. REITs can help alleviate some of these requirements as they offer low minimum investments, they do not require investors to acquire a loan and the properties are managed by experienced real estate professionals. Although diversification does not guarantee against losses, a Non-Traded REIT can help diversify a portfolio that is heavily concentrated in stocks or other traded securities, by spreading out the risk and allowing investors to incorporate real estate into their portfolio.
What risks are associated with REITs?
As with any investment, REITs are not immune to risk. Some of these risks include, but are not limited to the following:
- There is no guarantee regarding future performance and upon the sale or distribution of the REIT’s assets; stockholders may receive less than their initial investment.
- Real Estate values can increase or decrease based upon economic factors, including interest rates, laws, operating expenses, insurance costs, unemployment, tenant turnover, etc.
- Publicly Traded REITs, which are traded on national stock exchanges, are subject to stock market volatility.
- Non-Traded REITs, which are not traded on any national exchanges, do not have a public market and, as a result, may lack liquidity and transferability.
- Distributions from REITs may be paid from offering proceeds, the sale of assets or borrowed funds.
- There are fees associated with investments in a REIT and those fees may affect the overall performance of the investment.
- Some REIT investments may involve Conflicts of Interest which could result in actions that are not in the long-term best interest of shareholders.
Hundreds of REITs exist in today’s marketplace, and it is important that investors perform adequate due diligence as they select the REIT(s) that best meet their investment objectives. It is important that investors understand the differences between a Publicly Traded REIT and a Non-Traded REIT. Investors should consult a financial professional with expertise in commercial real estate as many financial professionals are not adequately trained to understand the intricacies associated with these types of investments. Before investing in a REIT, investors should review a prospectus and understand the objectives, risks and fees associated with each investment. Prior to purchasing shares in a REIT, investors should consult a qualified tax professional to understand the tax benefits and risks associated with REIT investments.
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