REIT (Real Estate Investment Trust)
REITs, which stands for Real Estate Investment Trusts, are enterprises that specialize in owning or funding revenue-generating real estate properties spanning various sectors of the property industry. To be eligible to become real estate investment trusts, these real estate businesses must fulfill a number of standards. Most REITs are traded on prominent stock exchanges and provide investors with a number of perks.
Similar to mutual funds, REITs aggregate the funds of several investors. Individual investors can now profit from real estate investments without having to invest in, manage, or finance any real estate.
Most REITs follow a straightforward corporate structure in their day-to-day operations: they rent out space, collect rent on the buildings, and then distribute dividends to shareholders. Instead of owning real estate, mortgage REITs finance it. These REITs generate revenue through the interest on their investments.
To qualify as a REIT (IRC), a company must satisfy specific requirements outlined in the Internal Revenue Code. These include holding real estate assets for the long term, generating a significant portion of revenue from these assets, and distributing earnings to shareholders.
To be eligible to become a REIT, a business must in particular satisfy the following criteria:
- At least 75% of your assets should be placed in U.S. Treasury bonds, real estate, or cash.
- Rents, mortgage interest, or sales of real estate must account for at least 75% of your total revenue.
- Pay shareholder dividends on at least 90% of your taxable income every year.
- Identify yourself as a corporation-taxable entity.
- be run by a board of trustees or directors
- After its first year of existence, it has at least 100 stockholders.
- No more than five people own more than 50% of its shares.
REITs come in three varieties:
- Equity REITs - Equity REITs, which own and manage buildings that produce revenue, make up the bulk of REITs.
- Mortgage REITs - Mortgage REITs provide money to property owners and managers directly through mortgages and loans, or they do it indirectly by buying securities that are backed by mortgages.The net interest margin, which is the discrepancy between the interest they get on mortgage loans and the cost of funding these loans, is what ultimately determines their profitability. According to this concept, they might be susceptible to increasing interest rates.
- Hybrid REITs - Both equity and mortgage REIT investment strategies are used by these REITs.
- Based on how their shares are purchased and kept, REITs can be further categorized as follows:
- Publicly Traded REITs - Publicly traded REITs listed on national securities exchanges are available for purchase and sale by individual investors and are regulated by the US Securities and Exchange Commission (SEC).
- Public Non-Traded REITs - They do not trade on local stock exchanges despite being SEC-registered REITs. They are therefore less liquid than REITs that are traded openly. Nonetheless, because they are not impacted by market movements, they tend to be more stable.
- Private REITs - These REITs are not listed on national securities exchanges and are not registered with the SEC. Institutional investors are often the only ones who can own private REITs.
REITs have advantages and disadvantages, much like all investments:
- On the plus side, REITs are simple to purchase and sell because they often trade on public markets, which helps to offset some of the traditional real estate problems. REITs offer consistent cash flow and attractive risk-adjusted returns in terms of performance. A real estate ownership can also add value to a portfolio by providing diversification, dividend-based income, and payouts that are frequently higher than those of other investments.
- REITs have the disadvantage that they don't offer much in the way of capital growth. They are required by their organizational structure to return 90% of income to investors. Hence, the REIT can only be invested in to purchase additional holdings with 10% of its taxable income. Additionally, some REITs have substantial management and transaction fees, and REIT dividends are taxed as normal income.