Guide to Private REIT Investing (2024)

FAQs

Are private REITs a good investment? ›

This can be quite costly. Because they are subject to very few regulatory requirements, private REITs can save significant money in this area and can (theoretically) generate superior risk-adjusted returns when compared with their publicly-traded counterparts.

By law, REITs must distribute at least 90% of their taxable income to shareholders. This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares.

On average, public REITs offer dividend yields around 5% to 6%. In contrast, private REITs often provide yields in the 7% to 8% range, as reported by the National Real Estate Investor. This higher yield can be enticing for investors seeking greater income from their investments.

Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 shareholders (the 100 Shareholder Test) and five or fewer individuals cannot own more than 50% of the value of the REIT's stock during the last half of its taxable year (the 5/50 Test).

Investors should be aware that non-traded REITs may have high up-front fees or sales commissions. These REITS may also have annual management fees, and the management team may take a percentage of profits in the form of “promoted interest”. Together these fees can put a dent in the ultimate return that investors see.

Interest Rate Risk

The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.

For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.

Bad REIT Income means (i) the amount of gross income received by the Borrower (directly or indirectly) that would not constitute (A) “rents from real property” as defined in Section 856 of the Internal Revenue Code or (B) interest, dividends, gain from sales or other types of income, in each case, described in Section ...

In many cases, this can take around 10 years to occur. And with publicly traded REITs that fluctuate with the stock market, Jhangiani recommends holding onto them for at least three years.

You can buy shares in REITs similar to stock, and you mainly make money from REITs through dividends. REITs often own apartments, warehouses, self-storage facilities, malls and hotels. You can purchase REITs through an investment account, also called a brokerage account, similar to stocks.

How much of my portfolio should be in REITs? ›

“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.

Since most non-traded REITs are illiquid, there are often restrictions to redeeming and selling shares. While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value.

80-20 Rule: At least 80% of a REIT's asset value must be in completed and income-generating real estate, with the remaining 20% able to be invested in riskier assets such as under construction buildings, equity shares, bonds, cash, or under-construction commercial property.

Real Estate Investment Trusts (REITs) have become an interesting option for income investors due to their income payouts and capital appreciation potential. Distributions from REITs can provide income flow, but the income is considered taxable in the eyes of the IRS.

Debt-to-EBITDA

This is the most useful way to compare the leverage of a REIT with others. Many REITs directly report it, but it's an easy calculation if not. There's no specific debt-to-EBITDA ratio to look for, but if one REIT's ratio is significantly higher than its peers', it could be a red flag.

U.S. Investors

Section 199A Qualified Business Income Deduction: REIT dividends qualify for the 20% deduction without wage and basis limitations, unlike income from directly held properties. As such, high-net-worth individuals may have substantial savings by utilizing a REIT structure.

After a tumultuous year that saw shareholders rushing to pull money out of the industry's best-known non-traded real estate investment trusts, private wealth investors are showing signs they are regaining confidence in real estate.

These properties are often rented out, producing income. REITs distribute at least 90% of their income to their investors in the form of dividends. REITs are an easy way to invest in real estate without having to own property yourself.

Subscription Fees: Charged for processing your investment, these can range from 0.5% to 2% of your investment amount. Acquisition Fees: To cover the costs associated with sourcing and acquiring real estate assets, Private REITs may charge fees that typically range from 1% to 3% of the property acquisition cost.