Real Estate Investment Trusts (REITs)

REITs, or Real Estate Investment Trusts, are companies dedicated to owning, and in most cases, operating a variety of income-producing real estate. While a REIT is permitted to own a wide variety of property types, most specialize in one type of property. There are three main types of REITs: (1) an equity REIT, which owns direct or indirect equity interests in real estate; (2) a mortgage REIT, which invests in debt instruments secured by real estate; and (3) a hybrid REIT, which owns any combination of permitted debt and equity investments. REITs are further divided into two categories based on secondary markets: (1) exchange-traded REITs, which are publicly traded on an exchange; and (2) non-traded REITs , which are privately held and do not trade on an exchange.

Non-traded REITs present a number of unique disadvantages that are not found with exchange-traded REITs. The lack of a public market creates illiquidity and numerous valuation complexities. In fact, most investors find that the only way to dispose of shares in a non-traded REIT is by early redemptions effected through the REIT itself, a process which often results in redemption prices lower than the purchase price. Furthermore, the dividend distributions are not guaranteed and may exceed the available cash flow of the REIT. The timing and amount of any distributions rest within the discretion of the REIT’s board of directors, which may suspend or halt distributions. Finally, non-traded REITs involve substantial fees, sometimes totaling 20 percent of the amount invested. For these reasons and more, it is important that any potential investor discuss and understand the disadvantages of non-traded REITs with their broker before making a decision to invest.