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What is a Real Estate Investment Trust?
"REITs provide investors with a way to invest in real estate without the need to purchase or manage properties directly. They offer liquidity, as shares of REITs can be bought and sold on stock exchanges just like stocks, and they also offer diversification."
Cynthia Aasen | Registered Dealing Representative
A real estate investment trust (REIT) is a type of investment vehicle that pools money from multiple investors to invest in real estate assets. REITs are structured as trusts, and they issue shares that are traded on stock exchanges, similar to stocks. REITs are considered as a special type of corporation that are required to distribute at least 90% of their taxable income to shareholders as dividends. This provides a stream of income to investors, similar to the income generated by renting out a property, but with the benefits of diversification and professional management.
REITs can invest in a wide variety of real estate assets, such as commercial properties, residential properties, hotels, and mortgages. They can also take different forms, such as equity REITs, which own and operate properties, and mortgage REITs, which invest in mortgages and mortgage-backed securities.
REITs provide investors with a way to invest in real estate without the need to purchase or manage properties directly. They offer liquidity, as shares of REITs can be bought and sold on stock exchanges just like stocks, and they also offer diversification, as investors can buy shares in a REIT that owns a portfolio of properties rather than investing in a single property. Additionally, REITs typically pay dividends to shareholders, which can provide a steady stream of income.
It’s important to keep in mind that REITs are also subject to the fluctuations of the stock market, and the value of the shares can fluctuate with changes in interest rates and economic conditions. Additionally, REITs are also subject to different regulations than other types of publicly traded companies. Before making any investments, it is important to consult with a financial advisor and to conduct your own research to ensure that REITs align with your investment goals and risk tolerance.
What is a Waterfall Distribution?
A waterfall distribution, also known as a “promote structure,” is a method used to distribute profits and losses in certain types of investment vehicles, such as private equity, venture capital, and real estate funds. This method is used to align the interests of the investors (limited partners) and the general partner (or manager) of the fund.
The basic idea behind a waterfall distribution is to give the general partner or manager a certain percentage of the profits generated by the fund, called “promote,” only after the limited partners have received a specified return on their investment, called “hurdle rate” or “preferred return.” Once the limited partners have received their preferred return, the general partner or manager is entitled to receive a percentage of the remaining profits, which is typically higher than the percentage of profits allocated to the limited partners. This aligns the general partners’ interest with that of the limited partners, as they are incentivized to make investments that generate higher returns for the fund.
Waterfall distributions usually have multiple levels, depending on the return of the investment. For example, an investment with a 8% preferred return, 10% hurdle rate, and 80/20 waterfall distribution would mean that the limited partners will receive 8% return until they reach a 10% return and then 80% of the profits will be distributed among the limited partners, while the remaining 20% will go to the general partner.
It’s important to note that waterfall distributions are complex and can be difficult to understand, and the terms and structure of each distribution can vary widely. Additionally, these structures may not always align with the interests of the investors, therefore it’s important to carefully review the terms of a waterfall distribution and understand the
What are the Risks of REIT?
Real estate investment trusts (REITs) are companies that own, operate, or finance income-producing real estate such as office buildings, apartments, hotels, and shopping centers. REITs can offer investors exposure to the real estate market, but as with any investment, there are certain risks that investors should be aware of:
Interest rate risk: REITs typically finance their property acquisitions through debt and as interest rates rise, the cost of this debt increases and this can negatively impact the REITs performance.
Market risk: REITs are sensitive to changes in the real estate market, the property valuations, and rental income, any downturns in the market can affect the REITs’ revenue, earnings and share price.
Operational risk: REITs rely on property managers, leasing agents, and other third parties to operate and maintain the properties, if these individuals or companies do not perform as expected, it can affect the REIT’s earnings and financial condition.
Legal and regulatory risk: REITs are subject to various legal and regulatory requirements that can change over time, non-compliance can result in fines or penalties, which can negatively impact the REIT’s financial performance.
Liquidity risk: Some REITs’ shares can be thinly traded, meaning that it can be difficult to buy or sell shares quickly, especially in times of market stress or downturns, this can affect the value of the shares or make it difficult to redeem the shares if needed
Debt Risk: REITs may use leverage to invest in properties, a rise in interest rates can lead to increase in the cost of servicing the debt, this can cause a decrease in the cash flow and can negatively impact the REITs’ performance.
It is important for investors to be aware of these risks and to conduct thorough research before investing in a REIT. Also, it is worth noting that REITs are subject to tax regulations, and their dividends are taxed as ordinary income. It is also recommended that investors work with a financial advisor and read the REIT’s offering memorandum and other disclosure documents to understand the REIT’s investment strategy, the portfolio composition, and the fees associated with the REIT, among other things.
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Licensed as a professional real estate agent for 25+ years, Cynthia’s expertise is diverse – real estate syndication, development, multi-family value-add and strata ownership. Dually registered as Associate Broker with eXp Realty Canada Inc. and Dealing Representative with Integrated Equities Inc. she is able to offer investors access both public and private real estate investments in North America’s leading markets.
Cynthia and her team act as advisors helping you make informed decisions. Since 2015 they have raised over $100 million in limited partnership equity representing $400 million in real estate transactions since inception in 2015. In addition, they sold over 200 individually titled investor properties, offering “true” turn-key solution for active real estate investors – “You invest, we’ll do the rest”.
