A company called a Real Estate Investment Trust owns and operates various types of real estate properties. These types include mortgage, equity, private, hybrid, and publicly non-listed.
Real Estate Investment Trusts are often public companies that allow individuals to buy and sell shares of real estate through major stock exchanges. By meeting certain requirements annually, REITs can maintain a favorable tax structure.
REITs make it possible for people to invest in real estate without the need to personally locate, purchase, finance, and manage properties. REITs can operate a wide range of real estate assets.
What is a REIT and How does Real Estate Investment Trust Work?
Equity REITs, which are a type of REIT, function much like private equity firms or other groups that own, operate, and lend in real estate. They acquire and manage assets, generate income, and may sell assets as part of their investment strategy.
Mortgage Real Estate Investment Trusts, another type of REIT, invest in mortgages and also in other debt instruments and earn income through borrower payments. REITs differ from these other groups in that they generate funding through either private investors or a public initial public offering (IPO).
Real estate is often considered an illiquid investment because it is necessary to hold onto a property for an extended period. This is to see the significant appreciation and the high initial capital investment required to purchase and potentially renovate an asset.
Publicly traded Real Estate Investment Trusts can address these issues by allowing shares to be traded on the share market. This provides liquidity and allows investors to invest any amount they choose in shares. REITs also benefit from having a favorable tax structure, as they are not required to pay corporate tax.
To qualify and maintain REIT( Real Estate Investment Trust status), companies must adhere to the following principles on an annual basis.
- At least 75 percent of the total assets must be invested in real estate.
- At least 75% of gross revenue must come from mortgage interest, rental income, or real estate sales.
- At least 90% of taxable income must be distributed to shareholders as dividends (many REITs pay 100%).
- Must be treated as a corporation for tax purposes.
- Must have a group of individuals serving as a board of directors.
- At least 100 shareholders must be present.
- No more than 50 percent of total shares can be owned by no more than five individuals or entities.
Types of Investing in Real Estate Investment Trusts
The five types of REITs are:
Equity REITs are the most ordinary type of Real Estate Investment Trust. They allow people to invest in various types of real estate properties, including office buildings, warehouses, apartments, retail spaces, and medical facilities. They also allow people to invest in timberland, infrastructure, cell towers, data centers, self-storage facilities, hospitality properties, and specialty properties.
Real estate investment trusts that specialize in mortgages (mREITs) are publicly traded companies. These companies generate income by buying and originating mortgages and other debt instruments. They profit from the difference between the interest earned on these securities and the price of funding them.
REITs that have a mix of assets and mortgages in their portfolio are called hybrid REITs. These companies have a diverse range of holdings that include both physical properties and financial instruments like mortgages.
Public Non-listed REITs
They are registered with the Securities and Exchange Commission (SEC) but not exchanged on national exchanges and are known as public non-listed REITs. These types of REITs are available to the general public. But they are not traded in the same way as those that are listed on major stock exchanges.
These are a type of real estate investment trust that is not exchanged on national exchanges or officially recorded with the Securities and Exchange Commission (SEC). These trusts are typically owned by private investors and are not accessible to the general public. They are not subject to the same regulatory requirements as public REITs.
Advantages of REIT Investing – Real Estate Investing
- REITs can offer investors a combination of high dividends and potential for capital growth.
- Historically, REITs have performed similarly to value stocks and have outperformed bonds in terms of returns.
- REITs can be a good investment for those seeking a consistent income stream. They are required to distribute at least 90 percent of their taxable income as dividends each year.
Disadvantages of REIT Investing – Real Estate Investing
- While non-REIT real estate firms can retain and reinvest their income from the property during the first two years. REITs are required to distribute at least 90% of their earnings, leaving them with limited funds to invest back into the resources through capital improvements and renovations.
- While dividends from most sources are generally taxed at a minimum rate than regular income, dividends received from REITs are treated as ordinary income. It may be subject to a tax rate of 35% or higher, as opposed to the maximum 15% tax rate that is currently applied to dividends.