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Investing In Real Estate Investment Trusts (REITs): What Are They and What Risks Are Involved?

For thirty years, Shepherd Smith Edwards and Kantas (SSEK Law Firm) has worked with investors seeking to recover losses they suffered because a broker and their broker-dealer sold them real estate investment trusts (REITs) that were too high risk for their portfolios. The unsuitability of REITs for many investors has come even clearer in the wake of the coronavirus (COVID-19) outbreak and its impact on many investments.  

REITs are not for every kind of investor and a stockbroker should only recommend them if the customer can handle the risks involved and these investments can help fulfill, rather than derail, the client’s goals. Contact our REIT fraud law firm today if you have suffered substantial losses involving your real estate investment trust that you suspect may have been caused by broker fraud or negligence. 

What Are REITs?

There are different kinds of real estate investment trusts, all of which give investors a chance to get into real estate that is supposed to make a return and render dividends. A REIT is a company that owns and runs real estate assets, such as apartment buildings, mortgages, or commercial buildings, and generates income. 

Here are three main types of REITs:

Public, Traded REITs 

These are liquid investments, highly regulated and US Securities and Exchange-Commission (SEC) -registered. Anyone can invest in them. Because they are listed on the stock exchange, market volatility can impact their shares.  

Private REITs

These investments are not registered with or regulated by the SEC. They can’t be found on public exchanges, which means they are not impacted by market activity. 

Not a lot of public information is available about private REITs. Only accredited investors with a $1M net worth, minus the value of their private home, or those who have earned $200K annually for the last two years are allowed to invest in private investments. Liquidity may vary depending on the REIT and can be limited.  

Public, Nontraded REITs

These have to be registered with and regulated by the SEC. Although public, nontraded REITs can’t be found on stock exchanges. They generally aren’t very liquid, which means they aren’t easy for investors to redeem. Many nontraded REITs come with high upfront fees. Accredited and nonaccredited investors, including retail investors, are allowed to invest in nontraded REITs.

What Are The Risks Involving These Types Of Investment? 

Investing in real estate investment trusts of any kind does come with risks, such as the following: 

  • The inconsistent and fluctuating value of some REITs, especially those that are nontraded 
  • Possible, unanticipated tax consequences 
  • Strict rules regarding redemption and fees charged for redeeming too early
  • High commissions along with “issuer costs”
  • Some can include unspecified properties, which can leave investors with no way of knowing whether/not these are reliable investments
  • Overconcentrating an investor’s portfolio with too many REITs, which can increase the risks of loss
  • Poor liquidity, which makes it hard for investors to get their money back if they need the funds

Broker Fraud Involving Real Estate Investment Trusts

Stockbrokers are supposed to make sure a prospective investor not only knows what risks they are taking on with any investment but also understands the potential impact these risks could have on their portfolio. 

Broker-dealers must adequately supervise their registered representatives to ensure these investments are recommended only when suitable and only to investors who can handle the risks involved. 

REIT losses can be significant. At SSEK Law Firm, our  REIT fraud lawyers represent investors all over the United States. We’ve sued the biggest broker-dealers on Wall Street and collectively recovered many millions of dollars for thousands of investors. Your first consultation with us is a free, no-obligation case assessment.

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