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Real Estate Investment Trusts/Business Development Companies

A real estate investment trusts (REIT) is a form of real estate investment that is designed to reduce or eliminate tax while providing returns from real estate. There are three kinds of REITs: private, public non-traded and publicly traded. A business development company (BDC) is an organization that invests in and helps small- and medium-size companies grow in the initial stages of development. 

 

What is a REIT?

Modeled after mutual funds, a real estate investment trust (REIT) finances real estate investments through properties or mortgages. REIT investing operates similarly to mutual funds, as individual investors acquire ownership in commercial real estate portfolios that receive income from apartment complexes, hospitals, hotels, shopping malls, office buildings, etc. Many REITs are accompanied by DRIPs, or dividend reinvestment plans. REIT funds must pay out significant dividends in order to retain their REIT status and receive tax benefits. REITs also offer competitive long-term performance compared to other stocks. Diversification is a benefit of REITs, as the real estate market does not directly correlate to other types of stocks and bonds.

 

A private REIT is not registered with the SEC, and the shares are not listed on a public exchange such as the New York Stock Exchange (“NYSE”). Because these shares are not listed on a public exchange, the private REITs are not directly affected by stock market volatility.  Only accredited investors can purchase a private REIT. These products are illiquid and frequently have limited redemption windows that vary by company.

 

Public non-traded REITs must file with the SEC. Shares, however, are not traded on a stock exchange. These shares are also illiquid and not directly subject to stock market volatility. Non-traded REITs are required to make SEC filings and performance reporting is publicly available.  Non-traded REITs are available to all investors, but are subject to certain investment limits that vary by fund. Non-traded REITs are illiquid and frequently have limited redemption windows, which vary by company.

 

Publicly traded REITs are listed on a stock exchange and, as such, are subject to the volatility of the stock market. Because these REITs are registered with the SEC and publicly traded, there is significant public information available. There are no restrictions as to who can invest in publicly traded REITs. These REITs trade similarly to other publicly traded stocks. Publicly traded REITs are liquid and may be traded daily.

 

Business development companies (BDCs) allow purchases into debt and equity investments in mostly private companies. BDCs can be non-traded or may trade on a public exchange and have unique liquidity requirements. BDCs are regulated investment companies and must distribute over 90% of their profits to shareholders in the form of dividends. BDCs are typically invested in illiquid securities and can provide diversification opportunities to traditional stock and bonds investments.

 

How to Buy REITs/BDCs

Investors are encouraged to do adequate research or contact a broker/financial advisor, attorney or CPA to determine if REITs/BDCs are an appropriate investment. Once you have determined that a REIT or BDC is suitable for you, it can be purchased with your Self-Directed IRA or other retirement account at Mainstar Trust. Click here to find out how to use a Mainstar Trust account to invest in an REIT/BDC.