John E. Richardson, Jr.
CPA - CFP
Certified Financial Planner

A REIT is an acronym for a Real Estate Investment Trust. REITs typically invest in commercial real estate such as high rise office buildings, commercial warehouses, apartment complexes, shopping malls and other properties that are too expensive for the average investor. These properties are then leased to credit worthy tenants. Shares of the REIT are offered to the public just like any other investment. For those individuals that would like to own commercial real estate but don't have millions to invest, REITs can be an excellent option.

REITs can be traded or non-traded. Traded REITs are offered on stock exchanges and perform more like a stock than real estate. They are subject to market volatility just like any other stock. Typically, I do not recommend holding publicly traded REITs for this reason.

By contrast, a non-traded REIT performs more like real estate. It is designed as a long-term investment for five to ten years. Non-traded REITs are purchased for their dividends and the long-term appreciation potential of investing in commercial real estate. The dividends are generated from the rents received from their tenants. Typically, non-traded REITs pay a dividend of around 6% annualized based on the amount invested. The dividends are received on a monthly or quarterly basis. Additionally, the dividends received can be tax advantaged. Because the investor gets the depreciation pass-through of the underlying real estate, they are not taxed on the full cash dividend received. Instead, the investor is taxed on about two thirds of the cash dividend received.

At some point, the non-traded REIT will have a liquidity event. At that time, the REIT may decide to sell all or part of the properties. The original investors will receive the proceeds of this sale. Provided the properties have appreciated in value, the investors share in this profit. Another liquidity event option is for the REIT to list its shares on the stock exchange and thereby allow them to be publicly traded. The shareholders can then trade their shares on the open market. A well managed non-traded REIT will only take the shares public if they believe the shares will trade at a profit for the initial shareholders.

In summary, REITs can provide a good source of income in retirement with long-term appreciation potential. However, just as with any other investment vehicle, diversification and suitability is the key.

John E. Richardson, Jr., CPA, CFP® is a Senior Financial Advisor with Strongtower Financial in Escondido. If you have any questions or comments, please contact him at (760) 705-3520 or by e-mail at jrichardson@strongtowerfinancial.com.