A REIT is a corporation whose business is real estate. Using a pool of money raised from investors, the REIT purchases buildings or, less frequently, the mortgages on buildings. A REIT has a management team that’s responsible for overseeing day-to-day operations and ensuring that the corporation is profitable. Among other things, that means the REIT is focused on producing a steady stream of revenue for its investors.

(click the link below and watch a video explainging the basics of NON Traded Commercial Real Estate owned through a REIT!

http:// http://video.colecapital.com/ntr/default.aspx

331

What’s the difference between TRADED or NON-TRADED?

Most REITs are publicly traded. Their shareholders range from individuals to large institutions, such as pension funds, insurance companies, and mutual funds. And there’s an active secondary market, where REIT shares trade at a discount or premium to—that is, for less than or more than—their net asset value (NAV), or worth on paper.

 

Non traded REITs are available to investors who meet certain suitability standards. Here, too, the list may include both institutions and individuals. But there is no formal secondary market for these REITs and shares trade infrequently— though most programs have a mechanism for selling your shares to other buyers. These REITs tend to be non-correlated with traditional investments, which means that they tend not to be affected by the forces, such as changing interest rates or corporate earnings reports, that affect other securities.

 

When REITs are publicly traded, however, they’re subject to the pressure of meeting short-term expectations, just as other listed investments are. If these REITs seem to be providing stronger returns than other securities, they may attract added attention and their share price might rise. But if their returns are weaker than those of other securities, they face the risk that investors will sell—even if it means taking a loss—or put pressure on management to make changes. Because the price fluctuations affecting publicly traded REITs tend to be driven by changing economic conditions rather than changing real estate values, these REITs tend to rise and fall with other equities in the marketplace rather than providing a hedge against volatility.

 

Do REITs pay income?

REIT income flows to you and other investors in the form of monthly or quarterly dividends based on rent or mortgage payments from the REIT's investments. Equity REIT dividends often increase as rent payments increase, which can provide a hedge against inflation—though the dividends can drop in a market downturn or if the properties lose value.

 

If you’re retired, or you rely on income investments to supplement your annual earnings, REITs can provide a relatively stable cash flow. Similarly, you can use REIT income to fund college expenses or charitable remainder trusts. And, of course, you can use REIT income to make additional investments.

 

What are the Tax Benefits?

REITs don’t have to pay corporate income tax instead; they’re subject to an IRS rule that requires these corporations to pay out 90% of their taxable income as dividends. As a result, REITs can provide higher returns than other corporations because they have more cash available for distribution. That, in part, is what makes them attractive investments.

 

A special benefit of investing in REITs is that you can claim depreciation of real estate assets against your dividend income. As a result, you may not have to pay tax on the income until no depreciation value is left—at some date in the future when your income tax rate may be lower. Or you may be able to defer payment until the REIT holdings are sold. Then the income is taxed at the lower long-term capital gains rates.

 

Another advantage of REITs is that they don’t generate unrelated business taxable income (UBTI), an important consideration for investors who own these investments in a tax-deferred or tax-exempt account such as an IRA or 401(k), or in a charitable remainder trust. (UBTI results when an otherwise tax-exempt organization realizes any income from a taxable subsidiary.)

 

Because a REIT does not pay corporate taxes, taxable REIT dividends don’t usually qualify for the low rate that applies to most equity dividends—currently a maximum of 15%. Rather, when tax is due, it’s at your current rate for regular income, up to 35% at the federal level. Long-term capital gains distributions, on the other hand, are taxed at the lower rate.

 

How Diversified are REITs?

The majority of REITs own property and often specialize in a particular type of real estate—such as apartment buildings, hotels, shopping centers, self-storage units, office buildings, hospitals and other health care facilities, or low-income housing developments. Some equity REITs are geographically focused, while others are national.

 

You can diversify your REIT investments by buying REITs concentrating in different geographic regions, different areas of real estate, or different industries or market sectors.

 

What Due Diligence should I be aware of?

Before you invest in a REIT, you and Pinnacle Resource Management should review the quality and depth of the management team and the company’s business plan. You’ll want to consider the managers’ experience in overseeing the types of properties the REIT owns, as well as their experience in the industry, market sector, and geographic region where the REIT does business.

 

Because so much of a REIT’s cash goes to pay dividends, the business needs access to outside sources of capital. So in evaluating a REIT’s business plan, you’ll want to consider the provisions it has made for growth—specifically how it plans to raise new money.

 

The options are:

·         The sale of additional shares

·         Mortgage debt secured by its real estate assets

·         Corporate debt dependent on the company’s overall creditworthiness

 

The REIT’s overall debt level is another factor to consider. As the debt level increases, so does the business risk—and hence your investment risk.

                                                                          

You should check to see if a REIT’s debt is at the portfolio level or at the individual asset level. Portfolio-level debt can be riskier than asset-specific debt because when debt is linked to a particular asset, the lender doesn’t have any recourse beyond that asset if the tenant defaults.