Alternative Investments - Real Estate Investments


Real estate is an asset class that offers protection against inflation, as well as potential tax benefits. However, lack of both liquidity and diversification are drawbacks to investing directly in real estate.


Real Estate Investment Trusts (REITs).
REITs work much like closed-end mutual funds, but instead of owning a portfolio of securities, the REIT owns a portfolio of real estate properties and/or mortgages.

REITs are registered securities under the SEC and trade in the secondary market, like stocks. As a result, investors get the benefit of diversification (since most REITs own a large number of properties) and liquidity.

Unlike mutual funds, REITs are permitted to use leverage - the income from the properties within the REIT is then used to pay the costs of any loans involved.

There are two main types of REITs:

  • Equity REITs - these invest mainly in actual real estate properties, such as office buildings, apartment complexes, warehouses and shopping centers. Equity REITs are usually not highly leveraged.

  • Mortgage REITs - these invest mainly in mortgages and construction loans for commercial properties and tend to use leverage to a greater degree than equity REITs.

The following series of articles contain valuable information about REITs, such as how to analyze them, advantages and disadvantages, how to pick the right REIT and more:

REIT Taxation
Similar to mutual funds, REITs may qualify for conduit taxation on distributed net income. To qualify, an REIT must obtain at least 75% of its income from real estate-related activities and must distribute at least 90% of investment income to shareholders. There is no minimum distribution requirement for capital gains, but the REIT must pay taxes on the capital gains if they are retained rather than distributed.

Look Out!
REIT taxation is similar to that of mutual funds, but not identical. Note that mutual funds must distribute 97% of net income and 98% of capital gains, while the REIT requirements are much lower.


Real Estate Limited Partnerships
These real estate investments are set up with a general partner, who manages the properties and makes investment decisions, and a number of passive "limited partners", who simply enjoy the income and tax benefits of the real estate within the partnership.

Since partnerships are not taxable entities, each limited partner claims a pro-rated portion of income or losses on his/her own personal return. As a result, most real estate limited partnerships are created as tax shelters, so investors get the benefits of:

  • Depreciation deduction - on a straight-line basis over a life of 27 and a half years
  • Mortgage interest deduction - if property is leveraged
  • Long-term capital gains - when property is sold


Exam Tips and Tricks
Consider this sample exam question about REITs:

  1. The following statements about REITs are all true, EXCEPT:
    1. They can be traded on the NYSE.
    2. 75% of their assets must be invested in real estate.
    3. 75% of their gross income must be from real estate-related investments.
    4. 90% of their net investment income must be distributed to shareholders to qualify for conduit tax treatment.

The correct answer is "B". REITs have no requirement for the percentage of assets invested.

Variable Annuities


Related Articles
  1. Professionals

    The Difference Between Series 63, 65 and 66

    After passing the first core examination, usually the FINRA Series 6 or Series 7, one hurdle remains. That’s the Series 63, 65 or 66.
  2. FA

    The Basics of The Series 79 Exam

    Passing the Series 79 exam is usually necessary for anyone who wants to work in investment banking.
  3. Term

    What is the Series 66?

    The Series 66 exam is one of two tests required to register as both a securities agent and an investment advisor.
  4. Professionals

    Breaking Down Financial Securities Licenses

    Find out which exam you need to begin your career as an investment professional.
  5. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  6. Professionals

    Who Needs to Take the Series 65?

    Most states require individuals to pass the Series 65 exam in order to act as investment advisors.
  7. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  8. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  9. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  10. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Series 79

    A examination to ensure a candidate is qualified to become a ...
  3. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  4. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  5. Financial Advisor

    One who provides financial advice or guidance to customers for ...
  6. Series 28

    An exam given by the Financial Industry Regulatory Authority ...
RELATED FAQS
  1. Is a financial advisor required to have a degree?

    Discover the minimum educational requirements and financial licenses needed to become a financial advisor in the modern corporate ... Read Answer >>
  2. Do financial advisors have to be licensed?

    Understand why all financial advisors have to be licensed, and identify the specific licenses you must obtain to carry out ... Read Answer >>
  3. If I have only a limited amount of time to study for the Series 6, what should I ...

    Learn what to focus on when studying for the Series 6 while reviewing important aspects of the exam, including its content ... Read Answer >>
  4. What role does the 'chip cycle' play in the electronics sector?

    Read about some of the best and most popular test prep classes for the Series 6 FINRA securities licensing exam, including ... Read Answer >>
  5. What does passing the Series 6 enable me to do?

    Learn more about the Series 6, what the examination and license are and what the license enables an individual to buy, sell ... Read Answer >>
  6. What are the differences between the Series 6 exam and the Series 7 exam?

    Learn about the regulatory exams needed to become a limited or registered representative and the main differences between ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center