A REIT (Real Estate Investment Trust) is a tax-advantaged investment vehicle created as part of the Cigar Excise Tax Extension with the purpose of buying and holding real estate. REITs are required to return 90 percent of earning to investors in the form of dividends and are not taxed on most of their earnings, as the taxes are paid by the investor when they claim the dividends as income.
While most REITs are traded on the public exchanges, non-traded REITs are sold by brokers. Doing so, non-traded REITs experience lower volatility and are less correlated to the stock market. The anticipation of any REIT is that the shareholder will eventually see income from its real estate collection with rent being the most common source of income. The types of properties that a non-traded REIT invests in early on might be unknown to the investors and the initial property assets might be made through a blind pool, where the investors do not know the specific properties that are being added to the program’s portfolio.
Unlike many non-listed investments, non-traded REITs are available to the public, with no accreditation limitations. As such, they are still subject to the same SEC reporting and regulations as those listed on exchanges, and should not be confused with fully private REITs, which are exempt from registration with the SEC.
As with any real estate investment, there are a number of other risk factors that should be considered, such as declines in market value, local economic conditions, operating costs, natural disasters, and more. When it comes to investing in non-traded REITs, selling points such as the opportunity for capital appreciation, diversification and the allure of a robust distribution can be enticing. But investors should balance these selling points against the numerous complexities and risks these investments carry. *not everyone is suited for Non-Traded REITs.
- Distributions are not guaranteed
- Distributions and REIT status carry tax consequences
- Lack of a public trading market creates illiquidity and valuation complexities
- Early redemption is often restrictive and may be expensive
- Fees can add up
- Properties may not be specified
- Diversification can be limited
If you have any questions regarding Non-Traded REITs please give Exclusive Financial Resources a call at (980) 242-2533, email Louis Herford at Louis.Herford@ExclusiveFinancialResources.com or schedule a 15-minute discussion here.