- A real estate investment trust (REIT) is a corporation that owns, operates, or funds assets that generate revenue.
- REITs provide investors with a consistent income stream but little in the way of capital appreciation.
- The majority of REITs are traded on the stock exchange, making them extremely liquid (unlike physical real estate investments).
- Apartment complexes, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses are among forms of real estate that REITs invest in.
Are REITs liquid or illiquid?
REITs are a means to diversify one’s investing portfolio by including real estate. Furthermore, certain REITs may pay even greater dividends than conventional investments.
There are, however, inherent dangers, particularly with non-exchange traded REITs. Non-traded REITs have unique risks because they are not traded on a stock exchange:
- Non-traded REITs are illiquid investments due to their lack of liquidity. They are often difficult to sell on the open market. You may not be able to sell shares of a non-traded REIT to raise money quickly if you need to sell an asset.
- Investors may be drawn to non-traded REITs because of their relatively high dividend yields compared to those of publicly traded REITs. Non-traded REITs, on the other hand, regularly pay distributions in excess of their funds from operations, unlike publicly quoted REITs. They may do so by using money from offerings and borrowings. This approach, which is uncommon among publicly traded REITs, diminishes the value of the company’s shares and the cash available to buy more assets.
- Conflicts of Interest: Instead of using their own workers, non-traded REITs usually hire an outside manager. This may result in potential shareholder conflicts of interest. For example, the REIT may pay a hefty fee to the external manager based on the number of properties acquired and assets managed. Shareholders’ interests may not always be aligned with these fee incentives.
What type of investment is a REIT?
REITs, or real estate investment trusts, are businesses that own or finance income-producing real estate in a variety of markets. To qualify as REITs, these real estate businesses must meet a variety of criteria. The majority of REITs are traded on major stock markets and provide a variety of incentives to investors.
Why are REITs illiquid?
A non-traded REIT is a type of real estate investment strategy that aims to cut or eliminate taxes while generating real estate returns. A non-traded REIT is one that does not trade on a stock market and, as a result, can be quite illiquid for extended periods of time. Due to the limited secondary market, front-end costs can be as high as 15%, which is substantially greater than a traded REIT.
Any REIT owner expects to receive income from its real estate portfolio at some point, with rent being the most typical source of income. The types of properties that a non-traded REIT invests in early on may be undisclosed to investors, and the initial property acquisitions may be made through a blind pool, in which investors are unaware of the precise properties being added to the program’s portfolio.
A non-traded REIT’s early redemption can result in significant costs, lowering the total return. Non-traded REITs are subject to the same IRS rules as exchange-traded REITs, which include repaying at least 90% of taxable income to shareholders. For income distribution, investors prefer exchange-traded and non-traded REITs.
Non-traded REITs must be registered with the Securities and Exchange Commission even if they are not listed on any national securities exchanges (SEC). They must also file regulatory files on a regular basis. This entails filing a prospectus, as well as quarterly and yearly reports.
Because they are not traded on national exchanges and may not generate a stable income at first, non-traded REITs may stay illiquid for years after their start. Non-traded REITs’ periodic payouts to shareholders may be substantially financed by borrowed cash. The payment of such payments is not guaranteed and may exceed the REIT’s operating cash flow. The non-traded REIT’s board of directors has the authority to decide whether or not to make distributions and in what amount. When a non-traded REIT is first established, its initial payouts may be wholly funded by the cash invested by investors.
Many non-traded REITs have a built-in time limit that must be met before one of two actions can be implemented. The non-traded REIT must either become listed on a national exchange or liquidate at the conclusion of the time. When the program is liquidated, the value of the investment invested into such a REIT may have fallen or become worthless.
Are publicly traded REITs liquid?
A REIT qualifies as a “pass-through” entity if it meets these requirements. It does not pay any corporation income taxes as a result of this. As a result, it has more cash on hand to give out in dividends to investors.
A public stock exchange, such as the New York Stock Exchange or the NASDAQ, is where a traded REIT trades. REITs that are traded are extremely liquid. Every market day, tens or hundreds of thousands of shares of most significant REITs change hands.
In addition to liquidity, traded REITs are available to all types of investors. All you need is a brokerage account, preferably with a low-cost online broker, and the funds to purchase stocks.
In this category, there are two types of REITs: private REITs and public non-listed REITs (PNLRs).
Let’s start with private real estate investment trusts (REITs). These are distinct from public REITs in a number of ways.
For starters, they aren’t traded. That means they don’t sell shares on a public exchange for everyone to buy and sell. Private placements or direct solicitation of investors are used to make investments. The majority of private REITs have strict holding restrictions. You could be stuck with your stake for five years or longer with very limited or no options to sell it. If they do provide a redemption scheme, it’s not uncommon for sales to be at a discount to the REIT’s value.
Second, only accredited investors are allowed to invest in these types of REITs under the law. To get recognized, you must have a particular level of income and/or net worth. Huge institutional investors, like as pension funds and organizations with large endowments, are the primary target of private REITs.
Finally, private REITs are exempt from the Securities Exchange Commission’s registration requirements (SEC). They also don’t file financial reports as a result of this. Individual investors without the means or knowledge to comprehend and verify the eligibility of any given firm face significant risk as a result of the lack of oversight.
As a result, most investors don’t have access to private REITs, and even if they did, they wouldn’t be a good investment.
They don’t trade on stock exchanges, and their redemption restrictions are similar to those of private REITs. They are, nevertheless, registered with the Securities and Exchange Commission. As a result, they have increased oversight and financial disclosures that are publicly accessible and examined by an authorised accounting firm. State securities regulators are frequently involved in their oversight.
PNLRs are more accessible to most private investors due to increased regulatory scrutiny.
REITs, both traded and non-traded, can be good investments. However, due of the disparities in their trading and ownership restrictions, it’s critical to comprehend them.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
How do I cash out my REIT?
Thousands of people who invested billions of dollars in non-traded real estate investment trusts are now learning that getting their money out is a little more difficult.
According to the Wall Street Journal, several fund managers are limiting the amount of cash clients can withdraw from their funds, or sometimes refusing withdrawals altogether.
Small individual investors were drawn to non-traded REITs since many only only a few thousand dollars as a minimum investment, while providing access to a relatively stable real estate asset class.
According to the Journal, these funds have received $70 billion in investments since 2013. Blackstone and Starwood Capital Group, two of the industry’s biggest players, have developed massive non-traded REITs, and both are still enabling investors to withdraw from their funds.
The only method to get money out of a REIT is to redeem shares because they aren’t publicly traded. As the economy has been decimated by the coronavirus, resulting in millions of layoffs, many smaller investors are feeling the pinch and looking for alternative sources of income.
Meanwhile, fund managers are attempting to maintain some liquidity. Some claim they have no method of assessing the assets in the fund portfolios or the fund’s shares in the face of pandemic-induced economic uncertainty.
In late March, commercial REIT InPoint halted the sale of new shares and stopped paying dividends. According to the Journal, CEO Mitchell Sabshon stated that redeeming shares that value the REIT’s assets beyond their real value would be unfair.
Withdrawal request caps are built into some funds, and the rush to get money has triggered them. If share redemption requests surpass a specific threshold, alternative asset manager FS Investment places a limit on them.
According to FS Investment’s Matt Malone, this was “intended to safeguard all investors by striking a balance between providing liquidity and being forced to sell illiquid assets in a way that would be damaging to shareholders.”
Dennis Lynch is a writer.
Do all REITs pay dividends?
A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.
All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.
How are REITs taxed?
Dividend payments are assigned to ordinary income, capital gains, and return of capital for tax reasons for REITs, each of which may be taxed at a different rate. Early in the year, all public firms, including REITs, must furnish shareholders with information indicating how the prior year’s dividends should be allocated for tax purposes. The Industry Data section contains a historical record of the allocation of REIT distributions between regular income, return of capital, and capital gains.
The majority of REIT dividends are taxed as ordinary income up to a maximum rate of 37% (returning to 39.6% in 2026), plus a 3.8 percent surtax on investment income. Through December 31, 2025, taxpayers can deduct 20% of their combined qualifying business income, which includes Qualified REIT Dividends. When the 20% deduction is taken into account, the highest effective tax rate on Qualified REIT Dividends is normally 29.6%.
REIT dividends, on the other hand, will be taxed at a lower rate in the following situations:
- When a REIT makes a capital gains distribution (tax rate of up to 20% plus a 3.8 percent surtax) or a return of capital dividend (tax rate of up to 20% plus a 3.8 percent surtax);
- When a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from
- When allowed, a REIT pays corporation taxes and keeps the profits (20 percent maximum tax rate, plus the 3.8 percent surtax).
Furthermore, the maximum capital gains rate of 20% (plus the 3.8 percent surtax) applies to the sale of REIT stock in general.
The withholding tax rate on REIT ordinary dividends paid to non-US investors is depicted in this graph.
Can REITs invest in government securities?
Companies that operate as real estate investment trusts (REITs) must concentrate their operations in one or more sectors of the real estate industry. If a government-issued bond is tied to real estate, it is eligible to be held by a REIT.
Weak Growth
REITs that are publicly listed are required to pay out 90% of their profits in dividends to shareholders right away. This leaves little money to expand the portfolio by purchasing additional properties, which is what drives appreciation.
Private REITs are a good option if you enjoy the idea of REITs but want to get more than just dividends.
No Control Over Returns or Performance
Investors in direct real estate have a lot of control over their profits. They can identify properties with high cash flow, actively promote vacant rentals to renters, properly screen all applications, and use other property management best practices.
Investors in REITs, on the other hand, can only sell their shares if they are unhappy with the company’s performance. Some private REITs won’t even be able to do that, at least for the first several years.
Yield Taxed as Regular Income
Dividends are taxed at the (higher) regular income tax rate, despite the fact that profits on investments held longer than a year are taxed at the lower capital gains tax rate.
And because REITs provide a large portion of their returns in the form of dividends, investors may face a greater tax bill than they would with more appreciation-oriented assets.
Potential for High Risk and Fees
Just because an investment is regulated by the SEC does not mean it is low-risk. Before investing, do your homework and think about all aspects of the real estate market, including property valuations, interest rates, debt, geography, and changing tax regulations.
Fees should also be factored into the due diligence process. High management and transaction fees are charged by some REITs, resulting in smaller returns to shareholders. Those fees are frequently buried in the fine print of investment offerings, so be prepared to dig through the fine print to find out what they pay themselves for property management, acquisition fees, and so on.
