A Real Estate Investment Trust-REIT is a tax designation used by corporations to invest in real estate that allows for the reduction or even elimination of corporate income tax. The structure of a REIT corresponds to investments in real estate similarly to the way mutual funds correspond to investments in the stock market. REITs were made available to the public to provide an opportunity for everyone to invest in large-scale commercial property.
Similar to other securities, REITS are sold on the major exchanges, are managed by professionals, receive certain tax considerations, and many times provide greater yields and liquidity than straight property investment.
The most popular types of REITS are Equity REITS. Equity REITS invest mainly in commercial properties and their revenues come mainly from rent, but also from the sale of properties. The other types of REITS are Mortgage REITS and Hybrid REITS. Mortgage REITS invest in and own mortgages and their revenues come mainly from loan interest. Hybrid REITS invest in properties and mortgages.
REITs pay little or no income tax but receive this benefit in exchange for distributing at least 90% of their taxable income, annually, through dividends to shareholders. This money is generally guaranteed to shareholders except in cases of extreme profit loss. Even in these situations, retained earnings can be distributed through dividends in order to remain within the provisions of the agreement, to continue to avoid having to pay corporate income tax.
In more recent developments, several REITs have actually distributed all of their current earnings and even more than their current earnings. This often results in dividend yields comparable to bond yields.
If in fact a Real Estate Investment Trust-REIT distributes more than its taxable income, the extra distribution is considered a return of capital for tax purposes. This means it is taxed as a capital transaction, rather than regular income. The distribution requirement may hinder a REIT’s ability to retain earnings and generate growth from internal resources.
Governed by the IRS code for dividend distribution, the REIT has a difficult time wooing growth-oriented investors. This can be offset by the appreciation of stock but, as always, the actual check and balance of the finance situation of the trust is on a case by case basis.
Real Estate Investment can be an intimidating process, but, as with most types of investment, there is assistance available. Mutual funds can be seen as a way for those less confident in their stock savvy to join together with like-minded individuals and to profit from a well-rounded portfolio.
A Real Estate Investment Trust-REIT is very similar to the mutual fund. It is, in its own arena, a means of pooling together various finances as well as a recruitment tool for investors in order to capitalize from the Real Estate market. REIT investment is a relatively safe avenue to take when attempting to break into the always fluctuating Real Estate market.
REITS are an excellent way for the novice investor to invest in Real Estate without having to worry about appraisals, inspections, rehabbing, renters and all of the other headaches associated with direct investment in properties.
A Real Estate Investment Trust-REIT is an avenue a novice investor can take to feel secure and safe about their investment endeavors. While any investment has risk, a REIT investment is considered by the investment community to be fairly safe due to the requirement of low leverage and payout of a vast majority of its earnings. Although, any real estate investment has inherent risk and you should consult with a financial or investment professional or your attorney.