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PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

What’s in a Word: REIT (Real Estate Investment Trust)

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  |  By Chris Shanahan, CISP®

When many retirement investors hear the word “REIT”, they often think of large, publicly traded companies like Boston Properties and General Growth Properties that are registered with US securities regulators and trade daily on a stock exchange. But REITs are a large asset class that also includes public non-traded REITs and private REITs.

So what is a REIT? At the high level, a REIT is an investment company that owns and manages real estate and real estate-related assets. REITs pool capital from many individual investors, giving those investors the opportunity to earn a share of the income produced through commercial real estate ownership without needing to actually purchase property. REITs pay out at least 90% of their taxable income to shareholders in the form of dividends.

Investors with a self-directed IRA have the choice among holding different types of REITs, including public exchange-traded REITs, public non-traded REITS and private REITs. It’s important to understand that REITs operate very differently, and this chart highlights some of those main differences:

Sources: Financial Industry Regulatory Authority (FINRA), National Real Estate Investor

One of the biggest differences among REITs is liquidity. While it can be relatively easy to get in and out of an exchange-traded REIT, non-traded REITs and private REITs do not trade on an exchange and often require long holding periods.

At PENSCO, where we custody self-directed IRA assets for more than 45,000 customers, many of our clients hold private REITs. Private REITs can only solicit accredited investors and they are structured as private placements. Private REITS can provide investors an opportunity to diversify a portion of their portfolios away from the daily fluctuations of the stock market, and they can potentially deliver higher returns than a public REIT.

Additionally, longer holding periods for these types of REITs match up well with retirement funds, which also often require longer holding periods.

As with any investment, conducting due diligence is critical. You’ll need to ensure the REIT fits your portfolio needs and fits within your desired investment time horizon.

If you are considering buying into a REIT — public or private — here are a few questions to ask:

  • What is the experience and expertise of the REIT management team?
  • How much will the fund disclose about the types and amounts of investments the REIT makes?
  • How will you be updated on the performance of the REIT?
  • What are the financial terms of the REIT, including front-end fees?
  • What are the potential exit strategies?
     

PENSCO’s Blog is purely for educational purposes. PENSCO does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Individuals are encouraged to seek professional advice before making any investment decision. Investments are not FDIC insured and are subject to risk, including the loss of principal.

Editor’s Note: This is an updated version of a post we originally published in July 2015. We welcome new comments and questions below