Publicly traded REITs (also known as exchange-traded REITs) have their securities registered with the Securities and Exchange Commission (SEC), file regular reports with the SEC, and have their securities listed for trading on an exchange like the NYSE or NASDAQ. A publicly traded REIT investment is often a liquid investment.
What is a REIT and how does it work?
REITs provide a simple option for investors of all sizes to add the historically successful investment class of real estate to their portfolios. REIT shares are owned by an estimated 87 million Americans today.
What exactly are real estate investment trusts (REITs)? A REIT (real estate investment trust) is a firm that invests in real estate that generates revenue. Investors who desire to gain access to real estate can do so by purchasing REIT shares, which effectively add the REIT’s real estate to their investment portfolios. This investment gives investors access to the REIT’s entire portfolio of properties.
Are public REITs a good investment?
REITs are a significant investment for both retirement savings and retirees who want a steady income stream to fund their living expenditures because of the high dividend income they generate. Because REITs are obligated to transfer at least 90% of their taxable profits to their shareholders each year, their dividends are large. Their dividends are supported by a consistent stream of contractual rents paid by their tenants. REITs are also an useful portfolio diversifier due to the low correlation of listed REIT stock returns with the returns of other equities and fixed-income investments. REIT returns tend to “zig” while other investments “zag,” lowering overall volatility and improving returns for a given amount of risk in a portfolio.
- Long-Term Performance: REITs have delivered long-term total returns that are comparable to those of other stocks.
- Significant, Stable Dividend Yields: REIT dividend yields have historically provided a consistent stream of income regardless of market conditions.
- Shares of publicly traded REITs are readily available for trading on the major stock exchanges.
- Transparency: The performance and prognosis of listed REITs are monitored by independent directors, analysts, and auditors, as well as the business and financial media. This oversight offers investors with a level of security as well as multiple indicators of a REIT’s financial health.
- REITs provide access to the real estate market with low connection to other stocks and bonds, allowing for portfolio diversification.
What is the difference between public and private REITs?
The main difference between public and private REITs, both listed and non-traded, is access. A public REIT can be purchased by anyone with enough money to invest (typically less than $1,000). If the stock is traded on an exchange, they can do so through a brokerage account. Meanwhile, if the REIT is not publicly traded, they can purchase shares directly from the REIT’s management business or through a third-party broker-dealer.
Accredited investors, on the other hand, can only invest in private REITs if they meet one of two criteria:
- Including their home residence, they have a net worth of more than $1 million.
Furthermore, an investor must be able to meet the private REIT’s initial investment requirement, which varies each organization and can range from $10,000 to $100,000. Furthermore, the majority of private REITs do not offer redemption schemes. As a result, they have the ability to lock up an investor’s money for several years. Finally, commission charges associated with a private placement sold through a third-party broker might be as high as 15% of the investment.
Another significant distinction between public and private REITs is that all public REITs are required to register with the Securities and Exchange Commission (SEC) (SEC). As a result, these REITs are required to produce reports on a regular basis. Private ones, on the other hand, are exempt from SEC regulation because they are not required to register. While the lack of regulatory control lowers operational expenses, helping to boost profits, it also raises the chance of individual investors falling prey to a REIT scam. That’s why the Securities and Exchange Commission requires private REITs to only accept accredited investors.
What is a publicly traded REIT?
Individual investors can purchase shares in real estate investment trusts (REITs), which are publicly traded businesses that generate revenue from a variety of assets. They make it simple for investors to invest in real estate firms that own, develop, and manage residential, commercial, and industrial properties.
REITs are required to pay out at least 90% of their taxable profits as dividends, among other things. Funds from operations (FFO), a measure of earnings specific to the REIT business, is an important REIT indicator. American Tower Corp. (AMT), Crown Castle International Corp. (CCI), and Prologis Inc. are some of the industry’s biggest names (PLD).
The COVID-19 pandemic has wreaked havoc on the commercial real estate market, with people all around the world adapting to working from home and different lockdown measures being implemented. Despite the revival of the economy, the recovery of the sector has been patchy. Workers returning to cities to live and work, for example, are now confronted with skyrocketing rates for privately owned and commercial flats, which are far more than when they left.
Do 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.
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.
Can you get rich investing in REITs?
There is no such thing as a guaranteed get-rich-quick strategy when it comes to real estate equities (or pretty much any other sort of investment). Sure, some real estate investment trusts (REITs) could double in value by 2021, but they could also swing in the opposite direction.
However, there is a proven way to earn rich slowly by investing in REITs. Purchase REITs that are meant to grow and compound your money over time, then sit back and let them handle the heavy lifting. Realty Income (NYSE: O), Digital Realty Trust (NYSE: DLR), and Vanguard Real Estate ETF are three REIT stocks in particular that are about the closest things you’ll find to guaranteed ways to make rich over time (NYSEMKT: VNQ).
How do beginners invest in REITs?
REITs are distinguished from other Wall Street stocks by a number of factors. The majority of real estate investment trusts’ assets must be invested in real estate. REITs, unlike their traditional real estate equivalents, are required to distribute at least 90.0 percent of their taxable revenue in the form of dividends to shareholders each year.
Due to their dividend restrictions, real estate investment trusts have limited growth potential. Profit distribution, on the other hand, has its own advantages. All dividends paid out by qualifying REITs are deductible from their corporate taxable income each year. Their taxable obligations are greatly reduced as a result of this.
be formed as a corporation that would be taxable if it weren’t for its REIT status
Within the first year of being recognized as a REIT, it must amass at least 100 shareholders.
During the past six months of a taxable period, no more than 50.0 percent of its shares were held by five or fewer individuals.
Rents, interest, financing, and dividends must account for at least 95.0 percent of gross income.
Non-qualifying securities or stock in taxable REIT subsidiaries cannot account for more than 25.0 percent of the REIT’s real estate assets.
The qualifications for becoming a REIT are stringent, but corporations that achieve them would enjoy significant tax benefits.
How do you get your money out of a 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.
What is one of the disadvantages of investing in a private REIT?
With all of the benefits in mind, it’s vital to note that there are a few significant drawbacks to investing in private REITs. Before you consider investing in a private REIT, you should be aware of the following potential drawbacks:
Transparency is lacking — Because private REITs are not subject to the same regulatory scrutiny as public REITs (in fact, they are excluded from SEC registration), managers have a lot of leeway to make decisions that aren’t always in the best interests of shareholders. Conflicts of interest, for example, do not have to be declared by private REIT sponsors. Furthermore, trustworthy performance statistics for private REITs as a whole can be difficult to come by. To be quite honest, this is the primary reason I don’t own any private REITs in my personal portfolio.
Only accredited investors are eligible to participate — Private REITs are only available to authorized investors due to greater risks, the potential for investor abuse, and the lack of a liquid market. This usually means they’re only available to institutional investors or individuals with at least $1 million in assets or $200,000 in annual income.
Lack of liquidity — It can be tough to cash out a private REIT once you’ve invested. Private REITs do not allow you to sell shares immediately when the market is open, as it does with publicly traded REITs. When it comes to stock redemption, each corporation has its own set of rules, which can be quite stringent.
High commissions (in most cases) — Because brokers sell private REITs to clients, a significant amount of your private REIT investment may go into commissions. In fact, private REITs have been reported to spend up to 12% in marketing costs and commissions. This means that if you put $10,000 into a private REIT, only $8,800 of it could be invested. That’s insane.
To be honest, not all private REIT commission arrangements are unfair, but it’s critical to be informed of the fees and commissions you’re paying. After all, other from the tiny trading commission required by your brokerage, publicly traded REITs have no commissions.
High minimum investments — Minimum investments in private REITs often range from $1,000 to $25,000, depending on the company (or more in some cases). A publicly quoted REIT, on the other hand, can be purchased for as little as one share, and many public non-listed REITs have similarly low minimums.
How do you tell if a company is a REIT?
A corporation must have the majority of its assets and income linked to real estate investment and must distribute at least 90% of its taxable income to shareholders in the form of dividends each year to qualify as a REIT.
