How REITs Work
Most real estate investors find investing in commercial real estate, simply out of reach financially.
Investing in income-generating real estate through a REIT can be a great way to increase your net worth.
You can pool your resources with other small investors, and invest in large-scale commercial real estate as a group.
A REIT holds a portfolio of income-generating commercial real estate, which allows most to pay attractive dividends to investors.
Funds are raised from unit holders through an initial public offering (IPO), and used by the company to buy a pool of real estate properties.
The properties are then leased out to tenants. The rental income is paid out to the unit holders as income distributions.
Most REITs have annual manager fees and other expenses that are deducted from their profits before distributions are made to investors.
Some REITs may hold properties in foreign jurisdictions that may be subject to taxation by the relevant jurisdictions.
REITs are corporations that own and manage a portfolio of real estate properties and mortgages. Any investor can purchase shares in a publicly traded REIT.
They offer the benefits of real estate ownership without having to buy and manage the property yourself. Shares can be quickly and easily sold.
There is less financial risk because you are investing in a portfolio of properties rather than a single property.
A REIT must distribute at least 90% of its taxable income to shareholders each year. Most REITs pay out 100% of their taxable income. REITs cannot pass tax losses through to investors.
Shareholders of a REIT stock earn a share of the income generated through real estate investment. Investors do not have to buy or finance a property acquisition themselves.
REITs allow anyone to own or finance properties the same way they invest in other industries, through buying shares.
What qualifies as a REIT?
To qualify as a REIT, a company must comply with certain provisions in the Internal Revenue Code (IRC).
A company must meet the following requirements to qualify as a REIT:
- Must invest at least 75 percent of assets in real estate, cash, or U.S. Treasuries
- Generate at least 75 percent of gross revenues from rent, interest on mortgages that fund a real property, or real estate sales
- Must pay a minimum of 90 percent of taxable income to shareholders as dividends each year
- Be structured as a taxable corporation
- Managed by a board of directors or trustees
- Have at least 100 shareholders and offer fully transferable shares
- Have not more than 50 percent of shares held by 5 investors or less
- Have not more than 20% of its assets consisting of shares in taxable REIT subsidiaries
- At least 95 percent of a REIT's gross income must come from financial investments.
Types of REITs
Publicly Traded REITs
Shares are listed on a public securities exchange. The shares are bought and sold by individual investors. They are regulated by the U.S. Securities and Exchange Commission (SEC).
Public Non-Traded REITs
Are registered with the SEC but do not trade on public securities exchanges. They are less liquid than publicly traded REITs. They are more stable since they are not subject to market fluctuations.
Not registered with the SEC and do not trade on public securities exchanges. Can only be sold to institutional investors.
Invested in shopping malls and freestanding retail.
Invested in multi-family rental apartment buildings as well as manufactured housing.
Invested in hospitals, medical centers, nursing facilities, and retirement homes.
Invested in office buildings.
How to invest in REITs
You can purchase the shares of a non-traded REIT through a broker or financial advisor who deals in the non-traded REIT’s offering.
REITs are publicly traded and offer investors a tool for portfolio balancing and diversification.
They also provide investors with ongoing dividend income, and long-term capital gains through share price appreciation.
What to consider before investing your money in a REIT;
Evaluate your own needs. REITs can provide income and long-term investment appreciation. Examine how the REIT management and trustees are compensated.
Study the REIT's management. Make sure the management has a stake in the company.
If you want to invest in income-producing real estate, a REIT might be the way to go.
How to earn money from a REIT
The amount of money you can earn from investing in a REIT depends on the success of the management, and market conditions.
A REIT can provide a reasonable return of 5% to 10% or more. Earning money from a publicly owned real estate investment trust (REIT) is like earning dividends from stocks.
You receive dividends from the profits of the company, and can sell your shares at a profit when the value of the shares increases.
You need to review a REIT's equity and mortgage properties before buying the shares.
REITs that invest in mortgage loans are more volatile than shares of REITs that focus on equity investment.
If your REIT investment loses money, you can deduct up to $3,000 of your losses from your taxable income.
It is important to understand the dynamics of the real estate market, as well as the performance of a REIT, before you buy the stocks.
Advantages of REITs
Ease of investing in real estate
REITs make it easier to invest in real estate with small amounts of money, and reap the benefits of capital appreciation and rental income.
They offer an excellent way of diversifying your investment portfolio through real estate without spending more money.
REITs are listed on the public stock exchange so you can sell the shares whenever you want.
Funding for real estate Projects
REITs help fund real estate projects and investments.
REITs are run by professional managers who can optimize returns for investors.
They offer an excellent way of protection against inflation since returns will be much higher than the inflation rate.
REITs are less volatile than equity. Property values and rentals are more stable than share prices.
Higher yields and returns
REITs offer predictable income streams because of long-term lease agreements with tenants.
REITs are listed and traded in the public stock exchanges. They must disclose financial information to respective investors on material risks, and business developments on a timely basis.
Simple tax treatment
REITs are exempt from VAT and stamp duty. The dividends are allocated to investors as capital gains, ordinary income and returns on capital.
REITs do not pay taxes at the corporate level. REITs only pay capital gains tax when they sell assets.
Competitive long-term stock performance
REITs have provided long-term returns when compared to other listed stocks.
Stable dividend yields
REITs’ dividend yields have continued to produce a steady income through many market conditions.
Disadvantages of REITs
- Low growth
- Dividends are taxed as regular income
- Subject to market risk
- Potential for high management and transaction fees
We can fund diverse projects such as;
Hospitality (hotels and resorts)
green energy projects
Logistics and transportation related developments
Residential and housing developments
ground up construction
commercial real estate
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