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What is a Distressed REIT and Can You Invest in One?


There is reason for investors to take a second look at distressed REITs because of the high potential for a good return on investment. There are some REITs you can invest in as an individual, but some, feature restrictions that limit them to corporate investors or for the very wealthy with high income thresholds. If you're not familiar with this type of investment, now is the time to learn about individual investor REITs, how a distressed market can work to your advantage, and how you can get in on the action.

What is an REIT?

Equity REITs are companies that are predominantly involved with the management or ownership of properties (real estate) that produces income. This may include, but is not limited to apartment buildings, office buildings, or shopping centers. These real estate companies lease space to their tenants. REIT is an acronym for Real Estate Investment Trust. The majority of REITs are referred to as equity REITs,and they are listed on the major stock exchanges. The trusts generate income from two main streams typically, and these include rents collected, and the sale of properties. After operating expenses are subtracted from the income, annual payments are made to shareholders in the form of dividends. Privately held REITs are the investment options that come with the highest restrictions in most cases, offered to the very wealthy and large corporate investors, according to Nareit.

What is a distressed REIT?

The distressed market has been the topic of copious research projects to better understand what causes a distressed market. This information is useful for investors who hope to gain future profits from investing in distressed stocks at the most appropriate time in the cycle. Distress risk is a measurement of the likelihood that a company will fail financially, or suffer in performance from the natural responses of many investors. When you look back over the history of distress risk and stock return on equity REITs, patterns emerge. Risk aversion can lead to more detrimental results, according to Jianfu Shen's assessment of the situation. An academic paper dissecting the relationships between distress risk and the stock return for equity REITS suggests that the higher the default risk, the greater the potential for a higher future return. High risk always poses a positive probability of failure, but like other stocks, investment in distressed REITs can yield higher results. Investments are always a gamble, but as we consider the current trends in real estate, and rationale for the distress factors, it may be a risk worth taking.

Factors leading to the current distress on REITs

The real estate market, particularly leases and rentals of office spaces and retailers have recently taken a hit due to the Coronavirus pandemic. Closed businesses around the nation, and the world have resulted in defaults, and late rent payments with some businesses filing for bankruptcy and closing their doors forever. Some have made arrangements with their landlords to forgive, or grant leniency in repayment of rents in arrears. According to the staff at Washington National Tax,Concerns over mortgage backed securities create an element of distress. The current situation opens up the opportunity for investors, including REITs with liquidity to move in and make acquisitions when distressed properties are at the best prices.

How investing in distressed REITs can benefit individuals

The outlook is dependent on what happens with the current status of movement within the economy, but there is a high likelihood that in the near future, the current restrictions on business openings, social interaction, and the demand for rental spaces will go up dramatically. This is good news for anyone who has invested in the real estate market. REITs stand to prosper as well as those who invest in them. The likelihood of distressed real estate investments experiencing a rebound after restructuring or resuming normal business operations is high, and they are likely to realize a greater value as the economy makes its recovery.

Can you invest in distressed REITs?

Some private REITs have restrictions that require all investors to pass eligibility requirements. The most common restriction include a net worth of at least $1 million not including the value of your primary residence, and an income over the past 2 years that is at or below a specified amount. Many are limited to large corporate investors with high minimum investment amounts. This cuts many investors out of the running. Publicly traded REITs, however are not restricted to the very wealthy or corporate investors.

Will Ashworth reports that there are 5 REIT types that individuals can more easily invest in. These include publicly traded retail oriented REITs, those involving mortgages, office spaces, healthcare facilities, and residential REITs. The publicly traded REITs have become more popular prior to the distress of the market which has made some investors leery of putting their bets on a rebound. From an analytical perspective, getting in on lower priced market shares for distressed REITs does present some degree of risk, as does any investment, but the chances of a higher ROI may be worth taking the chance, given the current circumstances. In any case, it's a good way to introduce diversification to your current investment portfolio, so you're not putting all your eggs in one basket.


Distressed REITs are an investment option that offers investors the opportunity to purchase shares from publicly traded real estate trusts when we're at a low confidence, hence lower price in the market space. With current quarantine impacts, and the likelihood that the restrictions on public interactions will lift soon, there is every reason to believe that the economy will make a rebound and that we'll see the investments in distressed properties follow suit. Yes, you can invest in a publicly traded distressed REIT, but each has its own minimum investment amounts.

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Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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