Real estate investment trusts (“REIT’s”) are vehicles through which an investor can invest in real assets. Real assets can include real estate such as commercial and residential rental properties and hospitals, as well as other income producing real property such as timber land. REIT’s can also hold real estate related debt instruments such as mortgage backed securities.
Similar to other trusts, distributions of income, dividends and capital gains from a REIT are passed through to the investor and are not taxable to the trust entity provided that certain requirements are met.
REIT’s can be publicly traded, similar to a stock, or be closely held by a small group of investors.
REIT’s which are not publicly traded oftentimes do not have much liquidity and can be difficult for an investor to dispose of in certain cases. Such REIT’s oftentimes have higher yields which compensate investors for taking on the additional liquidity risk.
Publicly traded REIT’s, on the other hand, tend to be liquid and be relatively easy to buy and sell on an exchange. The result of this is a “liquidity premium” where an investor will typically receive a lower yield from a publicly traded REIT than from a non publicly traded REIT in exchange for the REIT having greater liquidity.