Your compliance officer will tell you that as a financial advisor, it's your responsibility to verify your client's suitability for specific investment vehicles. Where do you begin? Here are some tips to help you determine if a particular client is suited for real estate investment programs.
Assess your client's liquidity needs -- Consider your client's total and liquid net worth at the time of investing. Based on the overall investment portfolio, determine whether he can afford to be without access to the invested dollars for the length of time required to invest in a real estate investment trust. Publicly registered REITs that are not traded on a public exchange often require holding periods ranging from three to 12 years after they have raised their equity capital.
Investigate state suitability requirements -- Historically, to qualify for REIT investment, an individual must have either a net worth of at least $150,000, or a combination of a net worth of at least $45,000 and an annual income of at least $45,000. While many REIT investments are subject to these requirements, recent changes to state laws mean that most new REIT offerings require a net worth of at least $250,000, or a combination of a net worth of at least $70,000 and an annual income of at least $70,000. The prospectus should provide the suitability requirements for the state in which your client resides.
Consider the stabilizing force of a REIT -- Help your client evaluate the alternatives and overarching characteristics of the investment options available with the following broad topics of consideration.
- Diversification: A REIT can help diversify your client's portfolio and create tax-efficient income. A non-traded real estate investment program also can add diversification due to a historically low correlation of non-public commercial real estate with traded stocks and bonds.
- Defined exit strategy: Identify real estate investment programs that have well-defined holding periods that enable the investor to know approximately how long their investment will be committed.
- Income producing, tax-efficient investment vehicle: By law, a REIT must garner 75 percent of its income from real estate and pass through 90 percent of its taxable income to shareholders. If the distribution requirements are met, no REIT-level taxes are incurred and tax characteristics of its properties are reported to its investors on the single Form 1099. Losses are not passed through to the REIT shareholder.
Types of REITs and investment styles -- Listed REITs trade on the public market and are subject to the traditional risks of equities markets. Because they are publicly registered, non-traded REITs do not trade on a public exchange and their share value is not affected by securities market volatility. REITs that focus on core investment programs generally employ conservative strategies for lower-risk investments held for a relatively long term. These programs are designed for investors seeking higher current income characteristics. Value-added and opportunistic programs generally have a shorter holding period, do not seek to produce significant current income, and assume a greater level of risk in exchange for greater capital appreciation potential.
Determining whether a particular investment is suitable for your client involves a number of considerations. When in doubt, consult with your firm's compliance officers before placing your clients in any new investment.
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