What is a REIT?
Rather than directly purchasing income-producing commercial properties such as industrial warehouses, office buildings, retail shopping centers or apartment buildings, many investors have turned to professionally managed real estate investment trusts (REITs), making real estate easier to own than ever. REITs are one of the most common ways to gain exposure to commercial real estate.
- Congress created REITs in the United States in 1960 as a way to make investments in large-scale, income-producing real estate accessible to individual investors. Prior to the creation of REITs, these types of investments were limited to institutions and wealthy individuals having the financial wherewithal to undertake direct real estate investment
- Most REITs do not pay corporate income tax and all REITs must annually distribute at least 90% of taxable income to shareholders — making them a current income vehicle1
Types of Public REITs2There are two primary types of REITs available to individual investors — publicly traded REITs and public non-traded REITs.
Publicly Traded REITs
- Traded on an exchange and registered with the SEC3
- Fluctuating price based on factors affecting the exchange-traded market
- Offer investors liquidity as shares can be bought or sold similar to other types of shares traded on an exchange
- Not traded on an exchange, but publicly registered with the SEC3
- Shares are sold to investors over a specified offering period at a price not subject to exchange-traded market fluctuations4
- Shares may not be traded unless listed on an exchange so non-traded REITs offer less liquidity according to a redemption schedule5
- Many REITs do not produce income, but yet may produce distributions. These distributions may represent a return of capital. There is no guarantee that shareholders will receive dividend distributions or that an investment in a REIT will be profitable or that it will realize growth in the value of its assets.
- Investing in real estate entails certain risks, including changes in: the economy, supply and demand, laws, tenant turnover, interest rates (including periods of high interest rates), availability of mortgage funds, operating expenses and cost of insurance.
- SEC registration should not be construed as an endorsement from the SEC.
- The initial share price of a non-traded REIT typically is determined arbitrarily and is not adjusted during the offering period. Accordingly, the underlying properties will fluctuate and may ultimately be worth less than the REIT initially paid for them. Since there is no public trading market for shares of non-traded REITs, investors may not be able to sell their shares in the investment.
- Generally, quarterly redemptions may not exceed the lesser of 1/4th of 5% of the outstanding shares at the date of measurement in the prior calendar year and the amount of shares sold pursuant to the distribution reinvestment plan in the preceding quarter. The board of directors may amend, suspend or terminate a redemption program at any time.