Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What advantage do Real Estate Investment Trusts (REITs) provide to investors?

1. High control over individual investments

2. Liquidity and tax advantages

3. Guaranteed returns on investment

4. Direct ownership of real estate properties

The correct answer is: Liquidity and tax advantages

Real Estate Investment Trusts (REITs) offer significant benefits to investors, particularly in terms of liquidity and tax advantages. By investing in a REIT, investors can easily buy and sell shares on major stock exchanges, which provides a level of liquidity that direct real estate investments do not typically offer. This means that investors can access their capital more quickly than if they were selling physical properties. Moreover, REITs also provide tax advantages, as they are generally required to distribute at least 90% of their taxable income to shareholders in the form of dividends. This allows investors to benefit from regular income distributions, and, in some jurisdictions, the income from REITs may be taxed at a lower rate compared to ordinary income. These factors combine to make investing in REITs an attractive option for individuals seeking a more flexible investment in real estate without the burdens of direct property management. In contrast, the other choices do not accurately reflect the core advantages of REITs: individual investments in REITs do not offer high control or direct ownership of properties, and there are no guarantees for returns, as investments in REITs carry market risks like any equity investment.