3 Risks of REITs You May Need to Know


How to invest in a reit

Real estate investment trusts (REITs) are real estate companies that offer common shares to the public. While they’re like the sort of stock that represents ownership — represents being commercial real estate partners — they also have two unique features that distinguish them. First, the primary business of a REIT is to manage groups of income-producing properties. Secondly, it also has to distribute most of its profits as dividends.

Here are just a few of the risks REITs may pose.

Less Than Liquid – Non-traded REITs are illiquid investments. You can’t really sell them readily on the open market. If you need to raise some money quickly, you probably can’t use the shares of a non-traded REIT to do so.

Share Value Transparency – A publicly traded REIT’s market price is readily available, but it can be difficult to get the value of a non-traded REIT’s shares. You also won’t be able to get an estimate of the value of a share until at least 18 months after their offering closes — nearly two years after you’ve invested. Consequently, you won’t know just how valuable shares of a REIT are for an exorbitantly long period of time.

Distributions May Be Paid from Offering Proceeds and Borrowings – While non-traded REITs do pay out high dividends in comparison with publicly traded REITs, non-traded REITs frequently use offering proceeds, and borrowings to pay distributions in excess of their funds from operations. This is not good. It can reduce the value of the shares and the capitol necessary to invest in additional assets.

These are just some of the risks that REITs pose to investors. If you have any questions, such as how to invest in REITs or why invest in REITs other than these benefits, feel free to share in the comments.

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