What is Real Estate Investment Trust (REIT)?

Real Estate Investment Trust, the same REIT, is a company that owns, operates, or finances income-generating real estate. Modeled by mutual funds, REITs bring together the capital of multiple investors. This enables individual investors to receive dividends on real estate investments; Without buying, managing, or financing any property.

REITs were established in 1960 as a change in the expansion of the cigar excise tax. The provision allows investors to buy shares in commercial real estate portfolios, previously available only to wealthy individuals and through large financial intermediaries.

REIT portfolio properties may include apartment complexes, healthcare facilities, hotels, data centers, office buildings, warehouses, and retail centers. In general, REIT specializes in a specific real estate sector. However, diversified and specialized REITs may have different types of assets in their portfolios; for example, REITs consist of both office and retail facilities.

Many REITs are publicly traded on major securities exchanges; Investors can also buy and sell them like stocks throughout the trading session. This REIT typically trades in significant volumes and is considered a very liquid instrument.

REIT System – Real Estate Industry

Most REITs have a simple business model. REIT rents space and collects rent on the property; It then distributes this income as dividends to shareholders. Mortgage REITs do not own real estate. However, they do finance. These REITs receive income from the percentage of their investments. It is worth noting that to qualify as a REIT, a company must comply with specific provisions of the Internal Revenue Code. These requirements include, first and foremost, real estate that generates income in the long run and the distribution of income to shareholders.

To qualify for REIT, a company must meet the following requirements: Invest at least 75% of total assets in real estate, cash, or U.S. treasury; Receive less than 75% of total income from rent, mortgage interest that finances real estate, or the sale of real estate. Must pay at least 90% of taxable income annually in the form of shareholder dividends; An entity that is taxed as a corporation; Managed by a Board of Directors or a Board of Trustees; Is at least 100 shareholders after the first year of its existence; Also not more than 50% of the shares are owned by five or fewer persons.

Types of REITs

There are three REIT types: Most are equity that owns and manages income-generating real estate. Income is primarily by rent. There are also mortgage REITs. They lend money to real estate owners and operators, either directly through mortgages and loans or indirectly through purchasing securities secured by mortgages. Their income mainly comes from a net interest margin, which they take out on mortgages and the cost of financing those loans. This type makes them delicate to interest rate raises. Hybrid REITs use both equity and mortgage REIT investment strategies.

REITs can be further classified according to how their shares are acquired and maintained. Shares of public trade REITs are listed on the National Stock Exchange, where they are bought and sold by individual investors. They are regulated by the U.S. Securities and Exchange Commission. Public non-commercial REITs are registered with the SEC; however, they do not trade on national securities exchanges. As a result, they are less liquid than public traded REITs. And yet, they are more stable because they are not subject to market fluctuations. There are also private REITs. This type is not registered with the SEC and is not traded on national securities exchanges. In common, personal REITs can only be sold to institutional investors.

Invest

You can invest in publicly-traded REITs, REIT mutual funds, and exchange trading funds; Purchase shares through a broker. You can buy non-trading REIT shares through a broker or financial advisor, Participating in the non-trading REIT offer. REITs also include defined benefits and a growing number of defined contribution investment plans. According to Nareit, approximately 145 million U.S. investors own REITs directly; Or through their retirement savings and other investment funds.

REITs can play an essential role in the investment portfolio; They can offer a strong, stable annual dividend and the potential to increase long-term capital. The gross payout ratio surpassed the S&P 500 index, other indices, and the inflation rate over the last 20 years.

The advantage of REITs is that they are easy to buy and sell. Most trade on public exchanges; This is a feature that alleviates some of the traditional drawbacks of real estate. In terms of efficiency, this is an attractive risk-adjusted income, As well as a steady flow of cash. Also, having real estate can be suitable for your portfolio; This provides diversification and income. Dividends are often higher than other investments you can make.

As for the disadvantages, REITs do not offer us in terms of capital increase. As part of their structure, they must pay 90% of the income to investors. So only 10% of taxable income can return to REIT to buy a new holding. The other cons are; That REIT dividends may be taxed as ordinary income. Some REITs have a high management and transaction fee.

REITs Example

The SEC recommends that investors be wary of trying to sell REITs that don’t register with the SEC. Verification is possible through the EDGAR system. It is also possible to use EDGAR; To review REIT annual and quarterly reports and any offering prospectus. Also, it is good to check with a broker or investment advisor who recommends REITs. The good news is that the SEC has a free search tool; This allows you to search whether the investment professional took the license or had a registration.

Another consideration when choosing REITs is to review the hot real estate market sectors. In general, in which developing sectors of the economy can real estate be applicable? For example, healthcare is one of the fastest-growing industries; Especially in the U.S., few REITs concentrate on this sector. Healthpeak Properties is one example. As of April 2022, it had a market capitalization of nearly $18.9 billion; Daily trade was about 4 million shares.

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