REITs: Traded vs. Non-Traded

Real estate investment trusts, or REITs, can be excellent investments. Many factors come into play, including risk tolerance, timeline, and your short- and long-term goals.

 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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