Real estate investment trusts (REITs) are specialized companies that allow individuals to invest in large-scale, income-producing real estate. A REIT typically owns and operates various real estate properties, such as office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, and warehouses. They may also be involved in mortgages or loans. Unlike typical real estate companies, REITs usually do not develop properties to resell but manage them as part of their investment portfolio.
Why Invest in REITs?
Investing in REITs enables individual investors to earn a share of the income produced from commercial real estate without directly purchasing properties. This can attract those looking to include real estate in their investment portfolios.
There are two primary types of REITs. First, we have publicly traded REITs registered with the SEC and traded on stock exchanges. Secondly, there are non-traded REITs registered but not traded on exchanges. Understanding whether a REIT is publicly traded is crucial as it affects the potential benefits and risks associated with the investment.
What To Expect In Return
REITs, particularly publicly traded ones, may offer higher dividend yields than other investments. However, non-traded REITs carry specific risks, such as lack of liquidity, difficulty determining share value, potential conflicts of interest, and possibly high upfront fees. These factors should be carefully considered before investing.
You can purchase shares through a broker to invest in publicly traded REITs. For non-traded REITs, shares can be bought through brokers participating in their offerings. REIT mutual funds and exchange-traded funds are also available for investment.
Publicly traded REITs may involve common stock, preferred stock, or debt security purchases, with applicable brokerage fees. Non-traded REITs generally have higher upfront fees, potentially lowering the investment value significantly.
What About Taxes and Other Concerns?
Tax implications are also an important consideration. Most REITs distribute at least 100 percent of their taxable income to shareholders responsible for paying taxes on these dividends and any capital gains. Consulting a tax adviser before investing in REITs is advisable.
Finally, verifying the registration of REITs with the SEC is crucial, especially to avoid fraudulent offerings. The SEC’s EDGAR system can be used to check a REIT’s registration, review its financial reports, and offer prospectus.
