A real estate investment trust (REIT) is similar to a mutual fund in that investors pool their monies to participate in real estate ownership or real estate financing. In return, investors receive a return on their capital in both the payment of dividends, and an increase in equity through the growth of the company.

The framework for REITs was established when the U.S. Congress passed the Real Estate Investment Trust Act of 1960. Its purpose was to provide a mechanism whereby average citizens could partake in large-scale real estate investing.

Assuming the REIT companies met specified criteria, they were qualified as pass through entities thereby eliminating double taxation.

By law, a REIT must distribute at least 90% of its annual taxable income, excluding capital gains, as dividends back to the shareholder.

REITs have gained a high degree of popularity because many professional financial advisors recommend that a portion of your portfolio be allocated to investment real estate.



REIT investors get many of the advantages of property ownership, but leave the landlord hassles to others due to the centralized management of the REIT properties.

As a REIT shareholder you may benefit from the distribution of dividends and get a share of the depreciation from the portfolio of real estate holdings held by the REIT. You gain an interest in institutional-quality real estate—likely far superior to what you could afford on your own—that may provide immediate cash flow from tenant rents. The properties may also appreciate in value so that your interests could ultimately be sold at a profit.



You may choose between publicly traded REITs, non-traded REITs, and private REITs. Your investment goals, desired holding period, and risk tolerance will help determine what type of REIT you select.

Publicly traded REITs are those that file with the Securities and Exchange Commission (SEC) and whose shares trade on national stock exchanges.

Non-traded REITs are filed with the SEC, but the shares do not trade on national stock exchanges. They are sold through offerings usually requiring a minimum purchase amount.

Private REITs are not registered with the SEC and the shares do not trade on national stock exchanges. They are not subject to state or North American Securities Administrators Association (NASAA) regulations.

Although there are distinctions between non-traded REITs and private REITs, the names are often used interchangeably.

Publicly traded REITs are relatively liquid due to a significant secondary market. Non-traded and private REITs have limited liquidity because the primary market for selling shares are the REIT companies themselves, making an early exit strategy difficult. However, most non-traded and private REITs offer repurchase agreements, typically involving a surrender charge, if an investor would like to opt out after a specified amount of time. Also, non-traded REITs may be taken public or liquidated with the proceeds distributed to the investor after a set holding period.

Investors must meet minimum suitability requirements to invest in non-traded and private REITs.



Non-traded and private REITs often appeal to investors who have grown dissatisfied with the ups and downs of the stock market. They typically require a small minimum investment, are well-suited for a mid- to long-term hold—generally 3 to 10 years—and may provide a stable cash flow and a good rate of return. They often attract those approaching retirement age whose investment objectives are on income-producing investments rather than high-risk growth investments. Non-traded and private REITs may be viewed as a way to fund one's own retirement. Pension and retirement funds may also include REITs. Opportunities exist for those focused on both income and income/growth objectives. REITs encompass a wide range of asset classes allowing investors to choice offerings which target their individual investment goals.

One of the major attractions of the non-traded and private REITs is their annual dividends. Dividends may be higher than what public REITs and other investments can offer.

In addition, REITs can limit your personal risk. An investor's liability is limited to their original capital contribution.

Non-traded and private REITs may allow you to maintain a properly risk-managed portfolio, reduce volatility, and diversify your traditional stock and bond investments.

Investor suitability requirements may be less than for other types of investments. In California, an investor must have a net worth (exclusive of home, furnishings, automobile, etc.) of $225,000 or a gross annual income of at least $60,000 and a net worth of at least $60,000. Suitability standards may be lower in other states and investors should familiarize themselves with the requirements of the REITs in which they are interested.



When you invest in a REIT you are reliant on the REIT sponsor for management decisions including property acquisition. Increased specialization of many REITs in either property type or geographic locations may heighten your susceptibility to market conditions.

To maintain qualification as a REIT, 90% of annual net taxable income must be distributed to shareholders. It might be necessary for the REIT to borrow funds in order to meet this requirement. In addition, if the acquired properties do not generate sufficient cash, a portion of your capital may be returned to you to maintain the targeted stockholder distribution rate.

Investors should note that because the property's title and deed are not held by individual investors, REITs do not provide Section 1031 tax-deferral for those wishing to exchange "into" or "out of" a REIT.

Please contact us to discuss the suitability of adding REITs to your investment portfolio. We have the expertise and know-how to help you achieve your personal financial goals.