Non-liquid real estate investment trusts (REITs) are pooled investments that allow investors to invest in a diversified portfolio of real estate properties. These investments are considered non-liquid because they cannot be easily bought or sold on a public exchange, making them more difficult to convert into cash. Investors should be aware of the risks associated with non-liquid investments, such as limited access to funds and potential loss of principal.
Which of the following best describes a non-liquid REIT?
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Select an option above to see an explanation here.
A) This describes a liquid REIT, not a non-liquid REIT. B) This describes a pooled investment, which can include non-liquid REITs but is not specific to them. C) This is the correct definition of a non-liquid REIT. D) This describes an exchange-traded fund (ETF), not a non-liquid REIT.
What is a potential risk associated with investing in non-liquid REITs?
A) This potential risk is associated with non-liquid REITs, which cannot be easily bought or sold on a public exchange. B) Non-liquid REITs often have higher dividend yields than other investments, which can attract investors. C) Non-liquid REITs do not trade on a public exchange, so this is not a risk associated with them. D) Non-liquid REITs typically invest in a diversified portfolio of properties, so this is not a risk associated with them.
Which of the following is NOT a characteristic of non-liquid REITs?
A) This is a characteristic of non-liquid REITs, as they invest in a diversified portfolio of properties. B) This is not a characteristic of non-liquid REITs, as they cannot be easily bought or sold on a public exchange. C) This is a characteristic of non-liquid REITs, as they may offer higher dividend yields than other investments. D) This is a characteristic of non-liquid REITs, as they may have limited access to funds due to lacking liquidity.
In the early 2000s, many investors were attracted to non-liquid REITs due to their high dividend yields and perceived stability. However, during the financial crisis of 2008, some non-liquid REITs experienced significant declines in value, and investors found it difficult to sell their shares due to the lack of liquidity.
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Example Series 65 Example Practice Question
An investor decides to invest in a non-liquid REIT with a portfolio of commercial properties, such as office buildings and shopping centers. The investor receives regular dividend payments from the rental income generated by the properties but may need help selling their shares to access their funds quickly.
Non-liquid REITs, a real estate treat, but beware the risk when it's time to retreat.
- 90% annual distribution requirement: REITs must distribute at least 90% of their taxable income to shareholders annually as dividends. - 75% income test: At least 75% of a REIT's gross income must come from real estate-related sources, such as rent, mortgage interest, or property sales. - 75% asset test: At least 75% of a REIT's total assets must be invested in real estate, cash, or government securities.
- 90% annual distribution requirement example: If a REIT has $1 million in taxable income, it must distribute at least $900,000 to shareholders as dividends. - 75% income test example: If a REIT has $1 million in gross income, at least $750,000 must come from real estate-related sources. - 75% asset test example: If a REIT has $10 million in total assets, at least $7.5 million must be invested in real estate, cash, or government securities.