What is a Real Estate Investment Trust?
According to the U.S. Securities and Exchange Commission, a real estate investment trust, or REIT, allows individuals or business entities to invest in large real estate projects that will eventually generate income. The REIT is a company itself and usually handles the real estate that is generating the profit and/or the assets of the real estate.
Common Examples of a REIT
A REIT will not develop a property and sell it to make property. The REIT will instead buy, develop, and operate the property in order to generate profit in the future and improve its investment portfolio. Common examples of a REIT property or assets include the following:
· office buildings
· apartments, hotels, and resorts
· shopping malls
· storage facilities
· warehouses
· mortgages and loans
If an REIT is registered under the Securities and Exchange Commission and publicly trades its stock, it is known as a publicly traded REIT. If the REIT is not publicly traded, it is referred to as a non-traded REIT.
Risks Involved with a Real Estate Investment Trust
REITs are attractive because they usually bring in more dividend that other investment opportunities. There are risks though. Common risks involve the following:
1. Few Liquidity Options: a non-traded REIT is hard to sell. If the company needs to sell an asset to make money in a short amount of time, an REIT is not a good option.
2. Value of the Share: the share value of a publicly traded REIT is transparent, but it’s difficult to prove the value of a share for a non-traded REIT. A non-traded REIT does not need to offer the estimated value per share until 18 months after the offering closed. Investors for an REIT may not receive the value of the non-traded share for years.
3. Distributions: a non-traded REIT will usually make distributions to investors before funds from operations have allowed the REIT to make such distributions. The distributions are usually offered with a combination of proceeds and borrowings, which decreases the value of the non-traded share.
4. Conflicting Interests: a non-traded REIT will normally have an outside manager instead of one of the employees. In some cases, the shareholders may disagree on the fees for the external manager.
Fees and Taxes Associated with a Real Estate Investment Trust
An REIT is required to pay at least 100 percent of its taxable income to the shareholders. The shareholders are then taxed on the amount of dividends and capital gains they receive from their investment. REIT dividends are treated as ordinary income and are not eligible for tax exemptions like other types of corporate dividends.
If the REIT is publicly traded, an investor can buy common stock, preferred stock, and debt security. A broker can buy these stock options for an investors as well, and broker fees will apply. A non-traded REIT usually requires an upfront offering fee of about 10 percent of the whole investment—which lowers the value of the investment in total.
