Private REITs
April 10th 2008 09:51 pm
A private REIT offers investors the opportunity to gain large profits in non liquid real estate investment trust.
A REIT is a solid vehicle for allowing those with limited capital to invest in real estate. REITs are essentially mutual funds that invest in the purchases, management or even financial lending for real estate investing. There are two further categories of REITs. The first is a publicly traded REIT which is available on the stock exchange and then there are private REITs that are not publicly traded. While most people have a clear idea of what a publicly traded REIT entails their understanding of a privately traded REIT may be very limited. This is why a clearer understanding of what a private REIT entails is needed so as to know whether or not this is the right type of investment for you.
A private investment, whether it is a REIT or some other type of investment, is an investment into a business for an extended period of time. The payments to the investors will be dividends over a period of time based upon either the profits or gross revenue of the investment. Here is an example of how a private REIT works: you are required to invest a minimum of $35,000 into the REIT and this will cover the “life” of the REIT which is, say, seven years. Your dividend residual income will be 3.5% gross over the course of seven years. That means the REIT must turn a profit of $1 million dollars in seven years for the investment to break even. If it earns a $3 million dollar profit in three years then you have tripled your initial investment in seven years which would be a colossal investment. However, if seven years go by and it becomes obvious this is a money losing venture…you are stuck. Since it is a private REIT you can not sell your shares in the manner of a publicly traded REIT.
This is not, however, a scam. When you invest in a business the business can not allow you to pull your money out because that would tank a business. If you promised a small child $1000 to run a lemonade stand for a year and asked for your money back after three months the lemonade stand would likely have to close shop. A private REIT follows the same logic. If you make an investment you are locked into it because providing the ability to pull out the investment would de-fund the business. This makes it an unsuitable investment for anyone that needs short term liquidity of their investment funds. But, it is also what makes a REIT a potentially huge investment as a successful private REIT could yield a huge windfall profit.
Let it be known the main benefit of a private REIT is the fact that it may end up paying a far higher interest rate than a publicly traded REIT. However, it is a far, far riskier venture. You can think of a private REIT investment as an investment in a real estate business. A private business is generally riskier than a publicly traded stock, but also offers a greater opportunity for gain.
A.M. Caro is a freelance writer from Southern California.
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