What is a Real Estate Investment Trust (REIT)
What is a Real Estate Investment Trust (REIT)
You may wonder; what is a real estate investment trust? A real estate investment trust, or REIT, is a type of company that lets investors pool their money to invest in a collection of properties or other real estate assets. REITs typically invest in commercial properties, either by acquiring them or developing them from the ground up. The properties are then rented to tenants, and the rental income generated is used to distribute to shareholders as dividends.
There are many risks associated with investments in REITs, including interest rate risk, dilution of share value and illiquidity. REITs are required to distribute the majority of their annual taxable income, so they are not able to build up cash reserves to strengthen their balance sheets and protect themselves against any adverse economic conditions. Given their inability to build up a cash reserve, REITs are heavily dependent on raising money from investors. It is common to see REITs conduct private placements as a way to raise more capital, which for an investor, means their investment may be diluted.
Non-trade REITs are also illiquid, which means an investor cannot gain access to their principal investment for many years (typically seven years). It is not uncommon for a financial advisor to misrepresent a REIT investment as a “safe” investment that functions similarly to a CD. If you believe you have been sold a REIT that is inappropriate for you, please contact us to assist you in your investigation of this claim.