What Exactly is a Real Estate Investment Trust?

In past years, stocks would have been considered the best long term investment, but as of last year, real estate has made its way to the top. According to this Bankrate survey that asked Americans “What is best way to invest money that you wouldn’t need for more than 10 years?” approximately 30% of all generations are in favor of real estate as a long term investment. Real estate can be a very lucrative investment at any age, however it usually requires a lot of money, or very good credit, to get started and is known to be a big time commitment. For busy individuals who might not have the extra cash for a huge down payment, a real estate investment trust (REIT) might be a less demanding way to get started.

Market Exposure - REITs allow investors to pool money together to invest in large-scale, income-producing commercial real estate. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. This collaboration provides people who may not have the funds to buy commercial real estate on their own with the opportunities to invest but without the time commitment and cost of buying and managing a property.

Diversity - By being in a different asset class than stocks or bonds, REITs, provide the opportunity to diversify a portfolio. REITs can be found in public and private markets, although publicly-traded REITs are the most liquid. Before investing in a REIT, you should understand whether or not it is publicly traded, and how this could affect the benefits and risks to you. For more, check out FINRA’s Investor Alert on reviewing non-traded REITs.

Appreciation - REITs are generally passive investments as opposed to active…meaning that they are generally suited best for long term investors rather than short term. Unlike other real estate companies, a REIT does not develop real estate properties to resell them. Instead, a REIT buys and develops properties primarily to operate them as part of its investment portfolio. A benefit to investing in REITs is the potential for long-term appreciation, if the real estate market you're invested in gains value, your shares may too.

Fees - Publicly traded REITs can be purchased through a broker. Generally, you can purchase the common stock, preferred stock, or debt security of a publicly-traded REIT. Brokerage fees will apply. Non-traded REITs are typically sold by a broker or financial adviser. Non-traded REITs generally have high up-front fees. Sales commissions and upfront offering fees usually total approximately 9 to 10 percent of the investment. These costs lower the value of the investment by a significant amount.

Taxes - When the REIT collects rental income from its properties, at least 90% of those earnings are returned to the investors as dividends. The shareholders of a REIT are responsible for paying taxes on the dividends and any capital gains they receive in connection with their investment in the REIT. Dividends paid by REITs generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends.

REITs provide the option to add real estate to an investment portfolio when it otherwise might not be feasible. Some REITs yield higher profit dividends than other investments, but with reward comes risk. Be extra cautious of non-exchange traded REITs and fraudulent salesmen. You can verify the registration of both publicly traded and non-traded REITs through the Securities and Exchange Commission’s EDGAR system. You can also use EDGAR to review a REIT’s annual and quarterly reports as well as any offering prospectus. Lastly, you should also check out the broker or investment adviser who recommends purchasing a REIT. To learn how to do so, visit the SEC’s Investor.gov page: Working with Brokers and Investment Advisers.