Thousands of people who poured billions of dollars into non-traded real estate investment trusts are now discovering that taking money out is a little more complicated.
Many fund managers are limiting how much cash investors can pull from their funds, or are refusing withdrawals altogether, according to the Wall Street Journal.
Non-traded REITs were attractive to small individual investors because many required only a few thousand dollars as a minimum investment, while offering entree into the relatively stable real estate asset class.
Those funds have attracted $70 billion in investments since 2013, according to the Journal. Some of the industry’s biggest entities have built huge non-traded REITs, including Blackstone and Starwood Capital Group; both are are still allowing investors to withdraw from their funds.
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.
Fund managers, meanwhile, are trying to maintain some liquidity. Some say they have no way of valuing the assets in the fund portfolios, or the shares of the fund amid pandemic-fueled economic instability.
Commercial REIT InPoint stopped the sale of new shares and stopped dividend payments in late March. CEO Mitchell Sabshon said it wouldn’t be fair to redeem shares that value the REIT’s assets above their actual value, the Journal reported.
Some funds have built-in withdrawal request caps, and the rush to pull out money has triggered them. Alternative asset manager FS Investment limits share redemptions if requests exceed a certain level.
That was “designed to protect all investors by striking a balance between providing liquidity and being forced to sell illiquid assets in a way that would be detrimental to shareholders,” FS Investment’s Matt Malone said told the paper. [WSJ] — Dennis Lynch
FAQs
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.
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.
How are distributions from non-traded REITs taxed? ›
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.
What is the 5:50 rule for REITs? ›
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).
What is the 90% rule for REITs? ›
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Can you lose money investing in REITs? ›
Can You Lose Money on a REIT? As with any investment, there is always a risk of loss.
How do I avoid taxes on REIT? ›
REITs generally don't pay taxes themselves as long as they distribute at least 90% of their income to shareholders.
Are REITs bad for taxable accounts? ›
REITs and REIT Funds
Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.
What is one of the disadvantages of investing in a private REIT? ›
Private REITs are not traded on an exchange, which means that there are more restriction in who can invest in them. As such, they tend to be less liquid than public REITs since it can be difficult for investors to find buyers for their shares should they decide to sell.
What is the 80 20 rule for REITs? ›
In situations where all investors submit cash election forms, the dividend payout formula will result in all shareholders receiving their distribution as 20% cash and 80% stock, which means that the cash/stock dividend strategy functions analogously to a pro rata cash dividend coupled with a pro rata stock split.
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.
What is the payout rule for REIT? ›
To qualify as securities, REITs must payout at least 90% of their net earnings to shareholders as dividends. For that, REITs receive special tax treatment; unlike a typical corporation, they pay no corporate taxes on the earnings they payout.
What are the limitations of REITs? ›
Limitations of REITs
| Pros | Cons |
|---|
| Liquidity | Lack of tax benefits |
| Option to diversify | Market risk |
| Transparent | Low growth prospect |
| Risk-adjusted returns | High maintenance fee |
1 more rowREITs and REIT Funds
Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.
What is the 75% rule for REITs? ›
For each tax year, the REIT must derive: at least 75 percent of its gross income from real property-related sources; and. at least 95 percent of its gross income from real property-related sources, dividends, interest, securities, and certain mineral royalty income.
