Risks Associated with REITs - A Guide for Investors

Recently, there is another form of investor fraud that is associated with REITs. In fact, the threat is so severe that both FINRA and the SEC have issued informative warnings about REITs and important risks and required broker disclosures to be aware of before investing in REITs. The issue with REITs is that the concept is quite advanced in terms of investment portfolio options, which helps deceive less experienced investors who are unaware of the risks associated with REITs. If you suspect that you have been the victim of fraud related to REITs, then read the information below to see how you can obtain legal assistance to potentially recover your lost investment.

An REIT (Real Estate Investment Trust) is a company that can own and operate real estate assets that produce income. REITs can include mortgages or assets such as apartments and/or commercial buildings. REITs can be found in many forms; however, some of the most common are: Office REITs, Retail REITs, Healthcare REITs, Residential REITs, and Industrial REITs. To learn more about the difference between Publically Traded REITs and Non-Traded REITs click here.

When investing in REITs, it is important to realize that your broker is required to disclose the risks associated with your investment. Below are potential risks to be aware of before investing in REITs:

One of the primary risks associated with REITs are the tax implications that are not properly explained to prospective investors. Income distributions that occur from current or accumulated earnings are usually taxed as ordinary income. These taxation rates change when the dividends are taxed, which can carry a tax rate of 15-20% depending on income bracket. Being aware of these tax rates should be factored into your decision of investing.

Since many of these REITs are not publically traded, they will have a fixed period of time where they will either have to become publically traded or be liquidated. Due to this inconsistency, there are many avenues for fraud due to fluctuation of value that could incur substantial investment losses.

There are many potential hidden terms within REIT investments where there is a limit on the number of shares that can be redeemed prior to liquidation. Many times, there are also excessive fees charged as well. Investors should be fully aware of these stipulations before agreeing to invest in REITs.

When REITs are not traded, they can have expensive and excessive fees. Fees can occur related to selling compensation and expenses along with “issuer costs,” which are also paid from the proceeds of the initial offering. According to FINRA regulations, selling compensation cannot exceed 10% and “issuer costs” and selling compensation cannot exceed 15% of the total initial investment.

There are many cases where the full portfolio of an REIT may not have specified properties. When this happens, investors have an enormous risk because they are not guaranteed reliable investment properties. It is wise to look at the percentage of the REIT that has specified properties to determine whether the investment is worthwhile.

REITs can lead to lack of diversification in portfolios if investors invest in various stages of the REIT process. It is wise to only invest a portion of your portfolio in REITs, if any at all.

There have been many cases regarding complaints pertaining to fraud associated with REITs. Silver Law Group is dedicated to representing the interests of investors that have been victims of investor fraud. Our firm has many years of experience recovering investor losses resulting from fraudulent investor schemes. If you suspect that you have been a victim of fraud associated with REITs and have questions regarding your legal rights or potential for recovery, please contact Scott Silver or the Silver Law Group for a complimentary consultation at ssilver@silverlaw.com or toll-free at (800) 975-4345.