Financial Industry Regulatory Authority (FINRA) Practice Exam

What kind of investment would be most suitable for an individual seeking liquidity and moderate risk in real estate?

1. A listed real estate investment trust (REIT)

2. An investment in individual rental properties

3. A real estate limited partnership

4. A nonregistered real estate investment trust (REIT)

The correct answer is: A listed real estate investment trust (REIT)

A listed real estate investment trust (REIT) is indeed the most suitable choice for an individual seeking liquidity and moderate risk in real estate. Listed REITs are traded on major stock exchanges, which allows investors to buy and sell shares easily, providing high liquidity compared to other real estate investments. This feature makes them an attractive option for those needing quick access to their funds. Moreover, listed REITs typically invest in a diversified portfolio of real estate assets, which helps to mitigate risk. This diversification, combined with the regulatory standards governing publicly traded companies, tends to make them a moderate-risk investment. These trusts generally offer the potential for income through dividends, as they are required to distribute a significant portion of their taxable income to shareholders. In contrast, investing in individual rental properties may offer high potential returns but comes with significant risks, including property management challenges, market fluctuations affecting rental demand, and higher illiquidity since properties cannot be sold as quickly as shares of a listed REIT. A real estate limited partnership usually requires a longer-term commitment and can involve more complex risk factors, often lacking the liquidity that an investor might seek. Nonregistered real estate investment trusts typically do not offer the same level of liquidity due to their lack of a public exchange,