Real Estate Investment Trusts (REIT)

A Real Estate Investment Trust (or REIT) can be a powerful investment tool. While past performance is not a guarantee of future results, real estate has historically posted strong returns, is considered a hedge against inflation and can play a part in a diversifed portfolio. REITs are designed to deliver steady income to investors in the form of dividends as well as growth potential in the appreciation of properties.

REITs also help investors diversify their assets. While most investors have their holdings in stocks, bonds and mutual funds, real estate is sometimes overlooked. A non-traded REIT is considered a non-correlating asset class and might not move in step with the stock market, which is important for portfolio construction. It is important to note that we can diversify to help mitigate some risk, but it is impossible to eliminate risk in investing and diversification does not guarantee against loss.

REITs may not have to pay corporate income tax, instead they are required to pay out 90% distributions of their taxable income as dividends. As a result, REITs can provide higher returns than other corporations because they have more cash available for distrbution. Another benefit is that you can claim depreciation of real estate assets against dividend income. As a result, part of your income could be sheltered.

There are two types of REITs: Traded and Non-Traded.

Traded REITs are bought and sold just like traditional exchange-traded stocks. While they can provide many of the benefits associated with direct real estate investing, traded REITs are subject to the same sort of market fluctuations as exchange-traded stocks.

Non-Traded REITs are not publically traded on a national stock exchange. Some investors view them as more stable than Traded REITs, even though they are subject to market fluctuations as well. The prices are usually posted annually. Non-traded REITs do not offer daily liquidity of Traded REITs, but some have limited liquidity features subject to guidelines in the prospectus and by the Board of Directors.

Risks of Investing in Non-Traded REITs

There are a number of risk factors to consider as you explore non-traded REITs. Non-traded REITs are available only to suitable investors, and investing criteria varies by program. Prior to investing in any program, read the prospectus in its entirety and all risks should be considered. Some of the risks associated with non-traded REITs include:

  • absence of a public market for these securities, lack of liquidity and an expected investment time horizon in excess of 5 years;
  • no guarantee that investors will receive a distribution. Distributions may be derived from the proceeds of the offering, from borrowings, or from the sale of assets, and we have no limits on the amounts we may pay from such other sources. Payments of distributions from sources other than cash flow from operations may decrease or diminish an investor's interest;
  • conflicts of interest between us and our advisor and its affiliates, including payments by us of significant fees to the advisor;
  • economic factors affecting the real estate markets generally, including changes in the economy, tenant turnover, interest rates, availability of mortgage funds, operating expenses, cost of insurance and each of our tenants' ability to continue to pay rent;
  • no connection between the share price of the REIT and the net asset value of the REIT until such time as the assets are valued by the Board of Directors
  • investor may experience total loss of principle 

Below is a link with even more disclaimers about Non-Traded REITs:

http://FINRA Public Non-Trade REIT Perform Careful Review

Please contact our office for a portfolio review or if you would like to learn more about REIT's.