REITs at a Glance
A real estate investment trust, or REIT, is a company that pools the money of many investors and purchases a diversified, professionally-managed portfolio of commercial real estate assets. REITs are legally required to pay 90 percent of taxable income as dividends and, therefore, have the potential to provide attractive streams of income.
There are various types of REITs. One way in which REITs vary is their investment focus. Similar to stocks and bonds, debt-focused REITs and equity-focused REITs have different risk and return characteristics. Holding both in an investment portfolio may help reduce overall portfolio risk.
Instead of buying properties directly, debt-focused REITs provide capital to finance the acquisition or refinancing of commercial real estate properties. These REITs typically generate income from contractually agreed upon interest payments and may be less vulnerable to economic downturns.
Often, debt-focused REITs emphasize income generation and preservation of capital and tend to offer better protection against declines in real estate property values than equity-focused REITs.
Equity-focused REITs acquire, manage, operate and sell commercial real estate properties. They generate revenue from rent which is the contractual obligation of the tenant. Once debt service costs are paid to the lender and all expenses have been paid, excess cash flow is available to equity-focused REITs for distributions to investors.
During periods of economic pressure, demand for space may fall and rents may decline, causing the income that equity-focused REITs provide, and the value of the properties they hold, to fall. During periods of economic prosperity, equity-focused REITs may offer the opportunity for growth in investor capital as property values rise.
REITs also vary in the ways in which they are bought and sold.
Publicly-Traded REITs are bought and sold on national securities exchanges and are more liquid than non-traded REITs. Because they are publicly traded, they move up and down with financial markets and are subject to the same market fluctuations and volatility as other exchange-traded stocks.
Public, Non-Traded REITs do not trade on exchanges and are not subject to the volatility of the markets. They tend to pay higher distributions than publicly-traded REITs, however, investors in non-traded REITs have limited liquidity.
How Non-Traded REITs Work
1) There is no guarantee of distributions. Distributions may be paid from sources other than income generated from the REIT’s investments. Investing in non-traded REITs involves various risks including but not limited to loss of principal, limited liquidity and lack of price transparency.
The Potential Benefits of Investing in Public, Non-Traded REITs
Given the historic uncertainty of the financial markets, we believe adding an investment in commercial real estate to a traditional investment portfolio may provide investors with a number of potential benefits including:
- Capital preservation
- Reduced portfolio volatility
- Increase portfolio diversification
- Provide an alternative source of cash flow
- Lower portfolio risk by reducing the correlation across major asset classes
- Help hedge against potential inflation
An investment in public, non-traded REITs may allow investors to participate in the overall benefits of investing in REITs without being subject to market volatility. However, public, non-traded REITs have limited liquidity and lack price transparency in comparison with publicly-traded REITs. In addition, an investment in commercial real estate does not guarantee that the benefits described above will be realized. We set the offering price of our shares arbitrarily. This price is unrelated to the net book value of our assets or to our expected operating income. If we raise substantially less than the maximum offering, we may not be able to acquire a diverse portfolio of investments and the value of your shares may vary more widely with the performance of specific assets.