Are Reits a good invest? Why or why not?

Question

I’m in a situation where I have a 1960 100,000 sq foot commercial property and it’s in need for a huge repair. So my question is do I keep the building or sell and go into a reit?

Mark Creason · Answer

@Willson Guimont

You can exchange into a Delaware Statutory Trust or a Tenant In Common, but not a REIT.  I have seen DSTs that have an upREIT attached to them.  In an upREIT, the DST converts into a REIT.  Although REITs potentially invest in real estate, they are technically not real estate.  In a 1031 exchange, you need to reinvest all the cash from the exchange into real estate for investment or business purposes.  So no personal residences.  You also need to reinvest an equal or greater amount than the net sale price of the property you sold.  If you don't accomplish both of these requirements, you can have boot.  Boot can be cash boot or mortgage boot.  Boot is taxed as profit first, so if you have 50k in profit, but take out 30k in mortgage boot, you will be taxed as if you had 30k in profit.  Hope this helps.  Feel free to reach out if you have any other questions.

Mark

Kyle Kadish · Answer

@Willson Guimont Dont forget about the qualified intermediary (QI).  A crucial element of the exchange, who hold proceeds and records the excahnge for tax purposes.  @Dave Foster is a QI who is active on BP.

Dave Foster · Answer

@Willson Guimont, REITs will not qualify for the tax deferral of the 1031.  If you want to defer payment of the tax on the gain of your sale through a 1031 exchange you're going to need to either purchase more real estate (either wholly or partially owned), or a DST (delaware statutory trust) that @Mark Creason mentioned.

The problem with a REIT is that you are purchasing shares of a company that owns many real estate assets and not purchasing actual real estate.  You might be surprised at what you find as returns now in the REIT arena vs DSTs or regular investment real estate.  The REITS have some very rigid controls on investment and leverage that make it more difficult for them to maintain healthy returns late in a market.

So you may be pleasantly surprised at what your true numbers might show when you combine tax savings, the opportunity to invest that tax for a return,  and the comparison between DST and REIT returns.

Willson Guimont · Answer

@Mark Creason

I thought you don’t need to pay capitial gains as long as all the money from the sale goes into the reit but once when you take it out from the reit then they hit you with the capital gains.

Willson Guimont · Answer

@Joe Ullrich

Great to know. Thank you

Mark Creason · Answer

@Willson Guimont

If you invest in a REIT with the proceeds from your sale, you will be obligated to pay capital gains taxes.  There are other ways to get where you want.  Feel free to PM me to discuss.

Mark

Joe Ullrich · Answer

Wilson, Your decision is based upon numerous items. If you rehab costs are extensive you can always wholesale the property and come out ahead depending on what you paid.  The decision comes down to the numbers and the amount of risk you are willing to take. I have been invested in REIT's for numerous years and have had good returns.

Are Reits a good invest? Why or why not?

Most Popular Reply