REITs generally have higher yields than bonds, making them good for income-seeking investors. But they also offer the prospect of your investment appreciating in value.
For most investors, it’s a simple matter of investing in a publicly-traded equity REIT. But depending on your income, net wealth, and other factors, you may be able to invest in private or non-traded REITs. Moreover, it might make sense for some investors to put some of their wealth into these non-traded REITs.
Let’s take a closer look at the differences between traded and non-traded REITs and what to consider before deciding where to invest.
What is a REIT?
A REIT (pronounced “reet”) is a special corporate structure for a business that owns, operates, develops, or manages real estate. REITs make real estate accessible to more investors.
By creating a corporation with certain tax benefits, REITs help level the playing field for retail investors who want to take advantage of the income and wealth-building power of commercial real estate. Most people don’t have a few million bucks laying around to buy a whole property. But with a REIT, you can buy part of one.
To qualify as a REIT, the company must:
- earn at least 75% of its income from rental income or other real estate activities,
- have 75% of its assets in real estate,
- have at least 100 shareholders,
- be no more than 50% owned by five or fewer individuals, and
- pay at least 90% of its net income as dividends.
By meeting these qualifications, a REIT qualifies as a “pass-through” entity. That means it doesn’t pay any corporate income taxes. The result is greater cash flow that it can pay out to investors in dividends.
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