By Hector Rojas, Fall 2016 Student Intern
Whether you are a first time investor, or whether you are a veteran investor looking to diversify your investment portfolio, the SEC’s Office of Investor Education and Advocacy has recently issued an alert to educate investors about investing in publicly traded REITs. Here is what you need to know.
REIT… What is it?
In a prior post, our blog defined a REIT, or real estate investment trust, as a company that owns—and typically operates—income producing real estate or real estate-related assets. We also mentioned that there are different types of income producing real estate or real estate-related assets, which may include real assets (e.g., apartment or commercial buildings) or real estate-related debt (e.g., mortgages). Finally, most REITs specialize in a single type of real estate—for example, apartment communities; therefore, there exists various types of REITs including, retail REITs, office REITs, residential REITs, healthcare REITs and industrial REITs.
Okay, so what is a publicly traded REIT?
A publicly traded REIT is simply a REIT that has their securities listed for trading on an exchange such as the NYSE or NASDAQ. What is an exchange? Well, think of an exchange as a shop for securities. At the exchange, investors can buy and sell their stocks. This means that an investor of a publicly traded REIT can buy or sell their stock with relative ease as opposed to non-traded REITs. Additionally, publicly traded REITs have their securities registered with the SEC and file regular reports with the SEC, which is information available to the public. This allows investors of publicly traded REITs to gain additional information on the particular REIT they are considering investing in. Non-traded REITs also register their securities with the SEC and file regular reports with the SEC, but they aren’t traded on an exchange.
Publicly traded REITs vs. Non-traded REITs… Advantages/Disadvantages
As mentioned above, the biggest difference between the two forms of investment is that one is publicly traded and the other is not. This creates certain advantages and disadvantages for an investor trying to decide between a publicly traded REIT and a non-traded REIT.
Perhaps the greatest advantage of a publicly traded REIT is just that, that it’s publicly traded. Being a publicly traded security, coupled with the fact that real-time market prices for shares of a publicly traded REIT are widely available to the public, allows investors to asses their investment and either purchase more shares if the investment is performing well, or sell their shares if their investment is underperforming. Non-traded REITs, in contrast, are not listed on an exchange and are not publicly traded; therefore, non-traded REITs do not provide a readily available market price for its stock.
Typically, publicly traded REITs are self-advised and self-managed. However, like non-traded REITs, it is not out of the ordinary for publicly traded REITs to be externally advised and managed. This creates a disadvantage for the investor in the form of a conflict of interest. The conflict arises since the external manager may be paid significant transaction fees by the REIT for services that may not necessarily align with the interests of shareholders, such as fees based on the amount of property acquisitions and assets under management. Therefore, these external managers may try to make a quick buck off of the uneducated investor for a service that is not in the best interest of the investor.
In general, however, REITs provide many benefits to investors. First, investing in real estate can be expensive and can require major time commitment from the investor. By investing in REITs, many investors find that a REIT investment allows them to diversify their investments to include real estate without having to invest in actual real estate and the hassles that come with it. Second, REITs have to distribute at least 90 percent of their taxable income for the year. Since most REITs generate income on rent received on their property holding, this requirement may result in regular dividend payments that income-seeking investors may find attractive. Finally, REITs do not incur the double taxation that can affect an investor’s return in a typical operating company. This means that the income that is distributed to investors is not taxed at the entity level. Instead, the income “passes through” to the individual and is only subject to tax when the investor reports the income on their personal tax return.
This sounds great and all, but should I invest?
Well, that is really up to you. We can’t give you any investment advice. But we can say that, as with any investment, you should take into account your own financial situation, your financial goals, research interested securities, and consult with a professional before making any investment decision concerning REITs. Be a prudent investor and do not only rely on what you are told about a particular REIT. Remember, you can review publicly traded REITs’ disclosure filings, including annual reports and quarterly reports and any offering prospectus using the SEC’s EDGAR database.
For more information on publicly traded REITs, click here.
For more information on non-traded REITs, click here.