REIT (Real Estate Investment Trust)
REIT stands for Real Estate Investment Trust, it can be seen as a mutual fund that instead of investing in stocks invests in real estate. It is an organisation that deals in securities which may be sold like shares on major exchanges. REIT invests in real estate either directly or through mortgages by making a combined pool of money from investors which can range from small retail type to large accredited ones.
REIT own income-producing real estate which are in form of offices, apartment buildings, warehouses, hospitals, hotels, shopping malls etc. It benefits investors in several ways such as helping them attain regular income streams, long-term capital appreciation, diversify their investment portfolio, invest in real estate with relatively small capital etc. REIT’s prove to be strong income vehicles because they pay out almost 90% of their taxable income to the shareholders in form of dividends and shareholders pay taxes on those dividend. As Real Estate Investment Trust receive special considerations regarding tax, so high yields and liquid methods are offered to investors.
Types of Real Estate Investment Trusts
1. Equity REIT – In this type, investment is made in owning properties or a part of it thus generating their core income either by property rents or by selling their long-term properties. Equity REITs are tilted towards specializing in owning certain building types such as apartments, shopping malls, corporate offices, hotels etc. Few concentrate on owning & generating revenues from a single type of building while others diversify.
2. Mortgage REIT – In this type, revenue is generated from investing not directly in the property instead investing it in mortgage related to a real estate. Money is either lent directly to the owners of real estate in form of a mortgage or existing mortgage is acquired or a mortgage-backed security is purchased. This may be done for both residential & commercial properties. Prime source of money is earned in form of interest generated on mortgages.
3. Hybrid REIT – It is a combined outcome of equity REIT’s and mortgaged REIT’s. This investment is done carefully in both properties and mortgages thus getting benefits of both the dimensions.
REIT – Common Qualifications
Different countries have different internal criteria(s) to qualify a company as a Real Estate Investment Trust, below mentioned are few common points across various nations:
1. Invest about 75% of assets in the field of real estate.
2. About 75% of gross income should be generated from real property or interests from mortgages.
3. Pay approx 90% of its taxable income to shareholders as dividends every year.
4. Should be controlled and managed by Board of Directors or Trustees.
5. At least have 100 shareholders.
Benefits of a REIT
1. High Yields – For most people, main attraction of this scheme is the income earned which usually outperforms the broader market making this a lucrative option.
2. Easy Tax Procedure – Tax issues with REIT’s are more straight forward when compared to other schemes or partnerships. A form 1099-DIV is sent to shareholders which contain the breakdown of dividends. Each year dividends are allocated from capital gains and ordinary incomes. So it becomes easy to invest here.
3. Liquid Asset – Since REITs can be listed as stocks on major exchanges hence they are easy to buy and sell. This makes them liquid & hassle free.
4. Diversification – Research has shown adding REIT’s to any investment increases returns and diminishes risk as they have very little correlation with the stock exchange(s).
5. Leverage – Usually a small investor with less to moderate initial capital can not buy real estate easily, they may never be able to get the benefits of investing in high potential commercial real estate such as shopping malls, office spaces etc. Such investors can leverage their investment and get the benefits they otherwise may never be able to get.