Broker Check



A REIT is a professionally managed company that owns, and usually operates a portfolio of income
producing real estate. Most REITs have an equity value of $500 million or more. Some have many
billions is equity. Investors include individuals, endowments, pension plans, insurance companies and
With REITs, the typical individual has the opportunity to diversify into a large portfolio of premium
properties that he/she would not be able to purchase individually. At the same time, this is a passive
investment with professional management in place. Any loans on the properties are totally nonrecourse
to investors.
Income generated by the REIT is available for distributions to investors, typically on a monthly basis.
The law requires that the REIT distribute 90% of taxable income each year.


Different REITs typically focus on one property type, although some REITs may diversify into more than
one property type and/or one geographic area. Property types include Apartments(multifamily), Office
buildings, Industrial/warehouse, Healthcare, Self-storage, Hospitality and Retail.
Many of the properties are subject to long term net leases with major credit tenants (Fortune 500


Traded REITs can be bought or sold on a stock exchange just like any other stock whenever the
exchange is open. Accordingly, they are liquid. They are also closely correlated to the general securities
Non-traded REITs are not bought and sold on a national stock exchange; but, like traded REITs, they are
regulated by the SEC. Unlike traded REITs, non-traded REITs are considered an illiquid asset. Some Non-
traded REITs have a provision that may allow for quarterly liquidity at a discount. Otherwise, investors
will not receive principal back until there is a liquidity event. This could mean an outright sale of assets
to a major pension plan or other institutional buyer, sale to a traded REIT, merger with a traded REIT, or
an IPO.



  • Monthly income potential. Monthly income from REIT distributions. The law requires that 90% of annual
    taxable income be distributed to shareholders. Distributions will increase to the extent such
    taxable income increases.
  • Appreciation potential. Any appreciation in value of the real estate should increase the value of
    the REIT shares. Investors will realize this appreciation upon liquidation of their interests.
    Diversification. Non-traded REITs are not highly correlated to the stock market. Therefore, this
    asset class should be considered a way to provide portfolio diversification and the potential for
    higher overall returns.
  • The Power of Compounding. Non-traded REITs typically offer investors a choice between 1)
    receiving monthly distributions in cash or 2) reinvesting the monthly distribution through a
    dividend reinvestment plan (DRIP program). With the DRIP program an investor benefits in 2
    ways. First, the investor can ordinarily buy additional shares at a reduced cost. Secondly, the
    investor benefits from compounding.
    For example, if you assume an original investment of $100,000 (10,000 shares at $10 per share),
    a 6% annualized distribution, and a $9.40 per share cost under DRIP, then at the end of year 3
    you would have 12,093 shares with an effective rate on the original investment equal to 7.7%.
  • “Portfolio Premium” on liquidation. Simply put, the accumulated properties are worth more
    than the sum of the value of the individual properties. Whether it’s a sale of assets or the REIT,
    merger or IPO, the parties recognize the premium value for a large portfolio of properties which
    was made possible by the hard work and expertise of the professionals that put the portfolio
    together over time.
  • “Liquidation Premium” on liquidation. There is a value premium recognized when the REIT goes
    from an illiquid to a liquid state. This occurs when the non-traded REIT sells to a traded REIT,
    merges with a traded REIT, or does an IPO.

The “Tax Cuts & Jobs Creation Act” provides that REIT ordinary income distributions can now benefit
from a 20% tax deduction. This has the effect of reducing the highest effective tax rate from 37% to
Ordinarily part of the distributions to shareholders constitute a return of capital and are not taxed
currently. This stems from depreciation and amortization; and such amounts reduce the cost basis of the
investment. There may be recapture of the deferred amounts as taxable income when there is a sale;
but the advantage is that such amounts are taxed at the favorable capital gains rates, not at the higher
ordinary income rates.

Have A Question About This Topic?

Thank you! Oops!