Can I pull my money out of a REIT?
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.
There are more than 100 REITs that trade on public stock exchanges. Exiting an investment in one of those is as easy as selling shares of any stock. But when it comes to a REIT that's controlled by a private equity firm, the fund itself must buy back an investor's shares.
Publicly-traded REITs offer the advantage of liquidity, since individual investors can sell their shares at any time. Privately-traded REITs don't offer this liquidity, but may offer higher dividends. REIT shares are eligible for a step-up in basis upon death, just like real property investments.
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.
REITs and stocks can both pay dividends, usually on a monthly, quarterly, or yearly basis. Some investments will also offer special dividends, but they're unpredictable.
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. Once a REIT is closed to the public, REIT companies may not offer early redemptions.
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.
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.
Publicly traded REITs are listed on major stock exchanges and can be bought and sold like any other publicly traded stock. These REITs offer high liquidity, allowing you to easily buy and sell shares. This is the most accessible option for investors.
Because of the increased risks, the potential for investor abuse, and the lack of a liquid market, private REITs are available to accredited investors only. This generally means that they're restricted to institutional investors or individuals with at least $1 million in assets or income of at least $200,000 annually.
What is the 80 20 rule for REITs?
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.
Reinvesting REIT dividends can help retirement savers grow their portfolio's investment, and historically steady REIT dividend income can help retirees meet their living expenses. REIT dividends historically have provided: Wealth Accumulation. Reliable Income Returns.
Real estate investment trusts, or REITs, are known for their dividends. The average dividend yield for equity REITs was around 4% in mid-2024 -- more than double the dividend yield of the average dividend stock (The S&P 500's dividend yield was less than 1.5%).
Selling Publicly Traded REITs
The process is straightforward, and liquidity is typically not an issue, allowing you to sell your shares quickly at market value. However, market conditions may affect the price you receive, as the value of REIT shares can fluctuate with broader market trends.
Steady dividends: Because REITs are required to pay at least 90% of their annual income as shareholder dividends, they consistently offer some of the highest dividend yields in the stock market. That makes them a favorite among investors looking for a steady stream of income.
| TIME PERIOD | S&P 500 (TOTAL ANNUAL RETURN) | FTSE NAREIT ALL EQUITY REITS (TOTAL ANNUAL RETURN) |
|---|---|---|
| Past 20 years | 9.7% | 10.4% |
| Past 10 years | 12.0% | 9.5% |
| Past 5 years | 15.7% | 10.3% |
| Past year (2023) | 26.3% | 11.4% |
REITs are like shares that are listed on the stock exchange, which means you can buy or sell anytime on the exchange.
To make as much money as possible, mortgage REITs tend to use a lot of debt—like $5 of debt for every $1 in cash, and sometimes even more. Plus, the interest rate on those short-term loans could increase, leading to smaller profits than expected—or even a loss.
REITs are required by law to distribute more than 90% of their earnings in the form of dividends, meaning all REITs should have a payout ratio of more than 90%. Some REITs, however, will distribute even greater portions of their earnings in which payout ratios climb to well over 100%.
Because the REITs aren't publicly traded, the only way to withdraw money is to redeem shares. As the coronavirus has crippled the economy and led to millions of layoffs, many smaller investors are feeling the financial pressures, and looking for other sources of income.
How do I get out of a REIT investment?
Basically you want to get all correspondence from the REIT to its shareholders. There must have been a prospectus. Check to see if the REIT has a wind up date (10 or even 20 years after formation)? At that point the REIT assets will probably be sold and you will be given a 'cash out'.
High interest rates make it more expensive for REITs to invest in new properties. They also tend to mean REITs' yields, a big part of their appeal to investors, are less competitive with other income investments.
Inconsistent, variable returns: REITs can be subject to fluctuations in the real estate market, leading to inconsistent returns. Economic recessions, changes in interest rates, or shifts in property values can all impact the performance of REITs, making their returns variable and sometimes unpredictable.
The REIT's ownership (which must be proven by transferable shares or by transferable certificates of beneficial interest) must be held by at least 100 shareholders for at least 335 days of a 365-day calendar year (or equivalent thereof for a short tax year) for the second taxable year and beyond.
The new restrictions cap monthly withdrawals at 0.33% of net asset value. The REIT, which manages about $10 billion, also said it would buy back only 1% of the value of the fund's assets every quarter, down from 5% earlier.
