Jamison is CEO of Neighborhood Ventures, one of the largest real estate crowdfunding platforms in the U.S.
Investing in real estate used to require saving up thousands to buy a rental property and then becoming a full-time landlord, collecting rent and trying to squeeze out a profit after paying the mortgage and expenses.
But now, with the emergence of crowdfunding (online investing), anyone can become a passive investor in REITs—real estate investment trusts—starting with as little as $100. My company has been providing real estate investment opportunities for years, and here’s my guide to REITs for new investors.
Private Vs. Public
There are two main types of REITs available: private and public.
Private REITs are not traded on a public stock exchange, while public REITs are. This key difference has several implications for investors to consider, including liquidity, returns and fees.
Public REITs are generally more liquid than private REITs because they trade on a public stock exchange. Investors can buy and sell shares of public REITs at any time during trading hours. With private REITs, on the other hand, investors may have to wait for a redemption event, which can occur quarterly or annually, before they can cash out their investment.
Additionally, private REITs may charge redemption fees. But, private REITs are often a more attractive investment choice for investors who are looking for higher potential returns. Private REITs don’t have the market volatility that you see with publically traded REITs, and they often pay more profitable dividends than public REITs.
Debt Vs. Equity
Under the REIT umbrella are two additional subcategories: debt and equity REITs.
Debt REITs invest in real estate-related debt vehicles, such as mortgages, mortgage-backed securities and commercial mortgage-backed securities.
Equity REITs own and operate real estate properties, such as office buildings, retail centers and apartment complexes. Equity REITs generate revenue from the rental income and capital gains earned on these properties.
And although equity REITs are generally considered to be higher-risk investments than debt REITs (because they are directly exposed to the fluctuation of the real estate market), I’ve found equity REITs also have a greater potential to generate higher returns.
Benefits Of REITs
REIT investments have several tax benefits that can be attractive to investors. Both private and public REITs are pass-through entities, which means that the income of the REIT is passed through to the shareholders, who are then taxed on their individual income tax returns. This can be especially advantageous for investors who are in a lower tax bracket than the REIT would be if it paid corporate income tax.
Private REITs can also distribute capital gains to their shareholders without having to pay corporate income tax on those gains. This is beneficial for investors who have held on to their REIT shares for more than one year and can pay the lower capital gains tax rate on their distributions.
REITs can also pass on depreciation to offset gains from REIT distributions. Investors can reduce the amount of taxable income that is subject to taxation, which can result in tax savings and minimize tax liability. This maximizes investment returns, which is especially important for investors who are seeking to generate steady income and growth.
Risks Of REITs
All investments contain risk, and it’s possible that the returns of the REIT in the future won’t match what they have been in the past.
It’s also possible that the value of real estate will go down, which would result in a decline in the value of your REIT shares. You should read the private placement memorandum (PPM) or prospectus and subscription agreement before you place your investment.
I think it’s also important to note that the SEC (Securities & Exchange Commission) recommends investing in REITs that are registered with the SEC. You can check if a REIT is registered by going to the SEC’s EDGAR online system.
You should only invest in what you understand. If the REIT you are interested in offers in-person or virtual events to learn more about the REIT’s investment strategy, this will help you make an informed decision. You should also be able to have a video meeting or phone call with the company to ask additional questions.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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