What is REIT: Real Estate Investment Trust ?

Real Estate Investment Trust

A Real estate investment trust is a special form of corporation that invests mainly in real estate through mortgages, property and even trade on major exchanges like a stock. REITs acts similar to mutual funds. REITs offer investors of all types regular income stream, long-term capital appreciation and diversification. REITs do not pay income taxes as long as they pay out 90% of their earnings as dividends to its shareholders.

How Does REIT Work?

From many investors real estate investment trust raise funds and directly invest that total in income generating real estate properties that include residential apartments, shopping centres, offices, hotels and warehouses, shops etc.

The assets of an REIT are held by an independent trustee on behalf of unit holders as the trusts are listed in stock exchanges in order that investors can purchase units in the trust. Thus, REITs are structured as trusts. Most real estate investment trusts (REITs) are traded on main stock exchanges though there are also public non-listed and private REITs.

Two major types of Real estate investment trusts are Equity REITs and Mortgage REITs. Equity REITs make income by the collection of rent on, and from sales of the properties they hold for the long run, whereas, Mortgage REITs invest in mortgages or mortgage securities together with commercial and residential properties.

REITs offer various benefits to the investors such as:

  1. Diversification

Diversification reduces risk of volatility and the losses from any one security thus investors who diversify their portfolio have great savings and other retirement benefits in future. Real estate is considered as the appropriate asset class that every investors must have as it will help to increase long term returns and reduces risk.

  1. Dividends:

REITs pay strong and reliable dividend payouts thus when people think about REITs, they think about ‘Dividends’. Mortgage REITs own money by financing income producing real estate and Equity REITs make by managing properties and generate income by collecting rent from tenants because REITs must go by at least all their taxable income to shareholders as dividends. If taking about long-term retirement savings then dividends do make a difference. For investors with a longer run, dividends can be re invested to get future returns, although in next years they can provide a stable income to help meet expenses in retirement.

  1. Liquidity: Stock exchange listed REIT shares can be easily bought and sold, thanks to liquidity of public markets.
  2. Performance: REITs track record of consistent and growing dividends along with long-term capital appreciation through increases in stock price has given investors with attractive total return performance for over the past 40 years. This makes total return performance for REITs investors who all are benefited from a strong annual dividend payout and long-term capital appreciation. As For an example, the total return performance over the past 20 years of REITs has exceeded the performance of the S&P 500 Index and other main indices, as well as the rate of inflation.
  3. Transparency: Stock exchange listed REITs give investors access to income-producing real estate along with the transparency of public markets.

To be eligible, REIT a company must:

  • Obtain as a minimum 75 % of its gross income from rents from real property (tenants), interest on mortgages, financing real property or by sales of real estate
  • Invest at least 75 % of its total property in real estate
  • Have to pay as a minimum of 90 % of its taxable income in the form of shareholder dividends every year
  • Establish itself as a taxable business entitity.
  • Be run by a board of directors (BOD) or trustees
  • Have at least 100 shareholders
  • Have not above 50 % of its shares held by 5 or fewer individuals.

Selling a REIT

Not anyone can sell a REIT. A proper SEC registration is a must for anyone before he starts selling REIT to investors.

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