REIT Investments

What Is a Real Estate Investment Trust (REIT)?

A real estate investment trust, or REIT, is a corporation, trust or association that owns (and might also manage) income-producing real estate or mortgages. REITs pool the capital of numerous investors to purchase a portfolio of mortgages or properties – from office buildings and shopping centers to hotels and apartments, even timber-producing land – which the typical investor might not otherwise be able to purchase individually.

Most REITs are traded on major stock exchanges, but there are also public non-listed and private REITs. The two main types of REITs are equity REITs and mortgage REITs. Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term. Mortgage REITs invest in mortgages or mortgage securities tied to commercial and/or residential properties.

Equity REITs

Most REITs operate as equity REITs, providing investors access to diverse portfolios of income-producing assets they would not be able to afford on their own. These real estate companies own properties in a range of real estate sectors that are leased to tenants, such as office buildings, shopping centers, apartment complexes and more. They distribute the bulk of their income to shareholders in the form of dividends. 

Mortgage REITs

Mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.

Public non-listed REITs

Public non-listed REITs are registered with the SEC but do not trade on national stock exchanges. Liquidity options vary and may take the form of share repurchase programs or secondary marketplace transactions but are generally limited.

Private REITs

Private REITs are real estate funds or companies that are exempt from SEC registration and whose shares do not trade on national stock exchanges. Private REITs generally can be sold only to institutional investors.

Potential Benefits of Real Estate Investment Trusts

• REITs pool the capital of numerous investors to purchase a portfolio of mortgages or properties which the typical investor might not otherwise be able to purchase individually.
• REITs can offer tax advantages. For instance, qualified REITs that meet Internal Revenue Service requirements can deduct distributions paid to shareholders from corporate taxable income, avoiding double taxation. The REIT must also distribute at least 90 percent of its taxable income to shareholders annually. These distributions are taxable to the extent of any ordinary income and capital gains included in the distribution.
• REITs allow investors to diversify amongst many different real estate assets such as apartments, net lease properties, retail shopping centers, office buildings, senior housing, senior secured debt and mezzanine debt, healthcare facilities or industrial properties. REITs allow investors access to real estate as a complementary tool to their stock and bond portfolio without the day to day management of the real estate.
• REITs are designed to provide an income in the form of a monthly or quarterly dividend. In addition, there is a possibility of appreciation.
• Investors are not required to guarantee loans and the minimum investment amount noted in each prospectus can be very minimal.

Potential Risks of Real Estate Investment Trusts

• REITs do not guarantee income or total performance. Diversification in REITs does not guard against loss of income nor loss of principal. REITs are subject to economic volatility.

• REITs may have conflicts of interest where the objectives of the management are not in the best interest of investors.
• Non-Traded REITs are typically illiquid.
• Distributions from REITs may come from cash flow from operations OR paid from offering proceeds, or sales or refinances of assets within the REIT.
• Fees associated with the REIT can affect the performance of the real estate.
• Investors should read the prospectus for the risks and benefits of each particular investment. Investors may wish to work with advisors, tax and legal professionals that understand the complexities of real estate investments and seek their professional guidance on potential income and potential tax ramifications.

Structure

Private and non-traded REITs and real estate funds are often structured as limited liability companies (LLC) and limited partnerships (LP).

Private REIT and real estate fund investments may require investors to be accredited – having a net worth over $1 million excluding their home equity OR income greater than $200,000 ($300,000 if a spouse works) in each of the two most recent years, with the reasonable expectation of meeting this income level in the current year. Please review the accredited investor definitions for other types of entities.

A Private Placement Memorandum may detail their plans for investment, acquisition, operations management, and other strategies. They are not suitable for all investors and carry certain suitability requirements. As with all investments that do not carry guarantees these investments are subject to the possibility of a loss of principal. Additional risks are illiquidity, fees, expenses, conflicts of interest, lack of control, market risks.