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Monday, May 10, 2010

Alternative Investing: Real Estate Investment Trusts (REITS)

Alternative Investing: Real Estate Investment Trusts (REITS)

A REIT or a real estate investment trust, is a company that generally:

• Pools capital of investors to acquire or provide financing for real estate properties;

• Allows individual investors to invest in a diversified real estate portfolio managed by a professional management team;

• Is required to pay distribution to investors of at least 90 percent of its taxable income (not including net capital gains) each year; and,

• Is not generally subject to federal corporate income taxes - see shareholders.

The concept can be broken down very easily.

If you bought a rental property and hired a property manager to collect the rents and take care of maintenance issues, you would receive the income minus fees and any associated maintenance expenses. At some point you would sell the property, and, hopefully walk away with your initial investment and some profit from the appreciation.

Although non-publicly traded REITs are not liquid, most have certain provisions that allow for discounted redemptions under hardship situations. However, investors should plan to hold these securities for the long-term (5-10 years). See this Business Journal story from Houston.

One last thing to add: Unlike publicly traded REITs that are open to new monies, there can be a limit to the capital raised for non-public REITs.

• Example could be a capital raise for XYZ REIT of $10 million.

• Once the $10 million is raised, this offering would be closed to new Monies.

Capital raises varies from REIT to REIT so you always want to read the prospectus for specific of the REITs.
Like any other investment, you always have risk. It’s important to diversify your risk with a well allocated portfolio, and always read your prospectus before investing.

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