A non-traded REIT is a form of real estate investment tool that can reduce taxes by providing potential distributions that are partially tax favored. Non-traded REITs are typically owned by a company that owns and operates income-producing real estate, or related assets.
These assets may include commercial office buildings, shopping malls, multi-family housing, hotels/motels, resort property, self-storage facilities, warehouses, and mortgages. Unlike many real estate companies, a non-traded REIT does not develop real estate properties for resale. Instead, a non-traded REITs buy and develop property primarily to operate them as part of its own investment portfolio.
Three Types of REITs
All non-traded REITs are governed by the Securities and Exchange Commission and the Internal Revenue Service. To operate a non-traded REIT, you must be a taxable corporation, managed by a board of directors. At least 75% of the assets held must be real estate investments, and there must be at least 100 shareholders. The key component of a non-traded REIT is that it is required to pay at least 90% of taxable income to its shareholders. The potential distributions make non-traded REITs appealing to long term investors or they are looking for tax favored treatment of dividends.
Equity REITs make up about 90% of the REIT investing market. An Equity REIT own and operate the real estate properties that are included in the REIT they are investing in. An Equity REIT is typically not sold for profit. Money is paid to investors from the rent made from the rental property.
Mortgage REITs are a less common type of real estate investment trust. A Mortgage REIT is a mortgage backed security, where the Mortgage REIT borrows money at short term interest rates, and then loans it to the owners and operators of real estate. The Mortgage REIT makes money on the interest accrued from these loans.
Investing in non-traded REITs, like Hartman vREIT XXI, Inc., involves a high degree of risk. You should carefully review the “Risk Factors” section of the prospectus for Hartman vREIT XXI, Inc., which contains a detailed discussion of the material risks that you should consider before you invest in shares of our common stock.
Equity REITs may be affected by changes in the value of the underlying property owned by the trust, while mortgage REITs may be affected by the quality of any credit extended. Such investments are subject to some of the risks associated with direct ownership of real estate, including market value declines, risks related to general and local economic conditions and increases in interest rates. Investing in special sectors, such as real estate, can be subject to different and greater risks than more diversified investing.