3.6.1. REIT Suitability
REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership. The investor can benefit from capital appreciation and dividends without having to buy and operate commercial real estate. REITs generally are income-producing investments, as REITs must pay out at least 90% of their income as dividends. They also have the potential for long-term capital appreciation. REIT dividends may be protected from erosion due to inflation because rental rates tend to rise during inflation. Returns on listed REITs historically have had a low correlation with the returns of other equities and fixed-income investments. Thus, investing in REITs can add diversity to a portfolio. REITs have shown a reliable dividend yield through a range of market conditions.
Shares of publicly traded REITs are sold on the stock market or the OTC market. Non-traded REITs, or non-exchange-traded REITs, also register with the SEC, but shares can only be purchased through a specialized broker. A third type of REIT, called a private REIT or private-placement REIT, also does not trade on an exchange. Private REITs generally are exempt from SEC registration and, thus, do not follow disclosure rules.
Investing in any REIT brings risk, which should be evaluated using the company’s prospectus, annual report, and other materials. As always, the investor’s risk tolerance, need for income, and net worth need to be taken into account before investing in a REIT. Because REITs depend on borrowed capital to varying extents, their costs are subject to change due to fluctuating interest rates. New REITs are particularly risky investments, as they lack a track record, making evaluation of their potential for success difficult. Mortgage REITs, which invest mainly in real estate debt, are usually highly leveraged and, thus, higher-risk investments than equity REITs. Most REITs specialize in a single type of real estate, w