Posted by The TaxAdvocate Group, LLC

What are REITs?

What are REITs?

Real Estate Investment Trusts (REITs) allows people to invest in wealth-generating real estate. The REIT is a corporation that generally owns and manages properties that generate income or related activities. These may include office buildings, shopping centers, apartments, hotels, resorts, warehouses, deposits, and mortgages or loans. Unlike other real estate companies, REIT does not develop properties to sell them. Instead, a REIT acquires and develops homes primarily to manage as part of its investment portfolio.

Why would someone invest in the REIT?

REITs offer individual investors a way to earn a share of their income through commercial real estate without having to buy commercial real estate.

What kinds of REITs are there?

Several REITs are registered with the SEC and publicly traded. These are known as REIT traded on the stock exchange. Others may be listed with the SEC but do not sell openly. These are called non-traded REITs. This is one of the several significant contrasts between different types of REITs. Before investing in a REIT, you need to know if it is publicly traded and how it can affect the interests and risks to you.

What are the risks and benefits of REITs?

REITs provide a way to include real estate in your investment portfolio. Also, some REITs may offer higher dividends than other investments.

However, there are certain risks, particularly for unlisted REITs. As they are not publicly traded, inaccessible REITs present particular risks:

  • Lack of liquidity: REITs that are not traded are non-cash investments. As a general rule, they cannot quickly be sold on the open market. If you have to sell a resource to raise funds quickly, you may not be able to do so with the shares of a non-traded REIT.
  • Value Transparency: Although the market price of a publicly traded REIT is readily available, it may be challenging to determine the value of an unleveraged REIT share. REITs that are not traded generally do not provide an estimate of their value per share in eighteen months of the end of the offering. This can happen years after investing. As a result, you may not be able to assess the value of your investment in a REIT and its volatility over a long period.
  • Distributions may be paid with the proceeds of the offering and the loan: REITs that do not trade their relatively high yields may attract investors compared to publicly traded REITs. However, unlike publicly traded REITs, non-commercial REITs often pay an excess distribution of their trading funds. For this, I can use the income from the offer and loans. This practice, which is not commonly used by publicly traded REITs, reduces the value of the shares and the money available to the company to purchase additional assets.
  • Conflicts of Interest: Unemployed REITs generally have an external manager in place of their employees. This could lead to conflicts of interest with shareholders. For example, the REIT may pay significant fees to the external manager based on the number of purchases and assets under management. These commission incentives are not necessarily consistent with shareholder interests.

How to buy and sell REITs

You can invest in a REIT listed on a large market, buying shares through a broker. You can buy shares of a non-marketed REIT through a participating broker in the unlisted REIT offer. It is likewise probable to buy shares of a real estate investment trust or a listed REIT.

Understand taxes and fees

Publicly traded REITs may be purchased through a broker. Generally, it is possible to buy common shares, preferred shares, or debts of a publicly traded company. Brokerage commissions will be applied.

A broker or financial consultant generally sell Non-recommended REITs. Unencumbered REITs have typically high initial rates. Sales commissions and early tender rates generally generate approximately 9-10% of the investment. These costs reduce the amount of investment by a significant amount.

Special tax considerations

Most REITs pay their shareholders at least 100% of their taxable income. The shareholders of a REIT are liable for the payment of dividend taxes and capital profits they receive in consolidation with their stake in the REIT. Dividends paid by the REIT are generally considered ordinary income and are not eligible for tax reductions on other types of corporate profits. Remember to consult your tax advisor before investing in REITs.

Avoid scams

Pay attention to those trying to sell REITs that are not registered with the SEC.

It is possible to check the list of REITs quoted and not marketed via the EDGAR system of the SEC. You may also use EDGAR to review the REIT's annual and quarterly reports, as well as any prospectuses. You should also consult your dealer or investment advisor who recommends buying a REIT.

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