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What are REITs? top
A real estate investment trust (REIT) refers to a trust company that owns, operates, and finances income-generating real estate investments. In its broadest sense, REITs do three things:
Like mutual funds, REITs are essentially pooled funds from many investors used to generate economies of scale and gain access to investment options that they would not normally be able to access individually.
Retail investors can invest in real estate without dealing with the difficulties of buying, managing, and financing the individual properties themselves. REITs also provide a tax benefit for investors since they are organized as trusts; they receive favorable tax treatment and must pay out virtually all of their income as dividends to investors. It makes REITs very attractive for older-income investors.
Qualifying as a REIT
REITs are considered 'pass-through' entities and do not pay any corporate income taxes. This means cash flow can be paid out to investors in dividends. To qualify as a REIT, the company must:
Common REIT Sectors
REITs generally specialize in specific real estate sectors such as:
Three Common Types of REITS top
There are three primary types of REITs:
Private REITs top
Private REIT investing is essentially an investor becoming a part-owner of a business. They are generally structured as a limited partnership with the general partners making investment decisions and managing the business while the limited partners are the investors providing the capital to invest in other properties. Other characteristics include:
Private REIT minimal initial capital investment that can range from $10,000 to more than $100,000 along with a net worth requirement of at least $1 million (excluding private residences) and/or income of $200,000 annually for the previous two years in order to qualify them as an accredited investor.
Because private REITs are limited partnerships, they don’t offer the kind of liquidity that publicly traded REITs do through stock offerings. Most private placements come with a lock-out period that can range from anywhere up to two years, but even following that period redemptions may not be possible. Until corporate action is taken to sell a property, investors may not see a return or have the ability to liquidate their holdings. Thus, private REITs are more beneficial for long-term investors only.
Since Private REITs are not subject to stock market valuations, it is less correlated to the markets and also less volatile. In addition to lower volatility, Private REITs can be a reliable income generation source.
Below is a general comparison of public vs. private real estate indices, on a rolling 3-year annualized return for public and private real estate since 1995. This is broadly representative of the performance between public and private estate returns experienced by medium-term investors. As you can see, the performance of private real estate diverges positively over time.
Public REITS top
Public-traded REITs are like other exchange-traded public securities. They are SEC-registered and regulated. Shares can be bought and sold on exchanges like NYSE and NASDAQ, making them highly liquid with standard trading fees. Additionally, there is no accreditation requirement which means anyone can invest. Because they trade on the market, they are highly correlated to the stock market and its volatility.
Non-Traded REITS top
Non-traded REITs (NTRs): Non-traded REITs are similar to publicly-traded REITs however, like Private REITs, shares of non-traded REITs are usually sold through broker-dealers with higher upfront fees.
Unlike Public-traded REITs that are correlated with the stock market, NTRs have a low correlation with the stock market and its volatility. The value of an NTR is determined by an appraisal of the properties owned by the trust. NTRs are also available to most investors without large initial capital requirements because they are regulated by the SEC, and they must be .transparent in providing financial information.
NTRs are illiquid, and lockup periods can be sometimes up to seven years. If redemptions are allowed, it may come at a substantial cost.
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