Are REITs Legal?


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While the encouragement of many brokers to diversify portfolios, many real estate investors have turned to REITs and Tics. These real estate investments in some ways have less overall risk and are a safer bet than investing and getting stuck with an individual property.

What are REITs?

Real Estate Investment Trusts (REITs) are funds used to borrow money to buy mortgages and mortgage-backed securities. The concept itself is legal; however, the Securities and Exchange Commission (SEC) is reviewing whether the use of these investment funds is an abuse of their exemption from regulatory restrictions that have now been imposed on banks to avoid financial crises.

The SEC is looking to see if REITs should be allowed to take more risk than typical investment funds. REITs borrow money in short-term markets to buy mortgages and mortgage-backed securities. They have become a major player in the U.S. mortgage financing industry due to the ever tightening restrictions on banks as well as Fannie Mae and Freddie Mac.

As a result of the SEC’s review, REIT share prices have fallen and lost their attractiveness. The major concern is the exclusion of REITs from the rules can raise the potential for abuse by companies. This could lead to incorrectly valuing a company’s holdings, powerful leveraging of monies, and too much power to insiders. New laws may be needed to reduce these risks by eliminating things like tax advantages.

The second concern is that placing borrowing limits on REITs could defuse the market demand for mortgages. This can further harm the housing market. The recent sharp decline in REITs share prices may limit REITs borrowing ability and decrease their ability to buy mortgages. If REITs slow down, the mortgage market will slow in demand as a whole.

The SEC is currently collecting comments on its proposal. If you as a real estate investor are concerned about changes in the handling of REITs, contact the SEC at sec.gov. They are looking for feedback from investors in all areas of the real estate industry, including residential, commercial, and retail. Each sector of the industry will have its own concerns and information on how the changes will affect them.

For more information on real estate investing and the real estate business, be sure to visit us at homevestors.com. We have fabulous real estate investment opportunities as well as opportunities for investment in real estate franchises available

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