A real estate investment trust (“REIT”) is a company that owns, operates or finances income-producing real estate .REITs provide an investment opportunity, like a mutual fund, that makes it possible for everyday Americans not just Wall Street, banks, and hedge funds to benefit from valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize.
Real estate investment Trust allows you to invest in portfolios of real estate assets the same way they in every other industry .
Through the purchase of individual company stock, or through a mutual stock.
produced – without actually having to go out and buy, manage or finance property.
Approximately 145 million Americans live in households invested in REITs through their 401(k), IRAs, pension plans, and other investment funds.
How Real estate investment trust works
REITs, or real estate investment trusts, were created by Congress in 1960 to give all individuals the opportunity to benefit from investing in income-producing real estate.
REITs allow anyone to own or finance properties the same way they invest in other industries, through the purchase of stock.
In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment, without actually having to go out and buy or finance property.
The REIT industry has a diverse profile, which offers many benefits.
REITs often are classified in one of two categories: equity REITs or mREITs. Equity REITs own a wide range of property types including offices, shopping centers, hotels, apartments and much more.
Equity REITs derive most of their revenue from rent on those properties
mREITs may finance both residential and commercial properties.
mREITs get most of their revenue from interest earned on their investments in mortgages or mortgage-backed securities.
In addition, REITs may be publicly registered with the Securities and Exchange Commission (SEC) and have their shares listed and traded on major stock exchanges.
They may be publicly registered with the SEC, but not have their shares listed or traded on major stock exchanges.
Or, they may be private companies (not registered with the SEC and not having their shares listed or traded on a stock exchange
The IRS implements the REIT rules and oversees what qualifies as a REIT.
The Internal Revenue Code requires a REIT to adhere to the following essential rules:
at least 75 percent of the corporation’s income must be earned from real estate as rent, real estate interest or from the sales of real estate assets;
at least 75 percent of the corporation’s assets must be real estate assets; and at least 95 percent of income must be passive.
REITs are required to distribute at least 90 percent of taxable income annually to shareholders as taxable dividends.
In other words, a REIT cannot retain its earnings. Like a mutual fund, a REIT receives a dividends paid deduction so no tax is paid at the entity level if 100 percent of income is distributed.
REIT shareholders pay taxes on dividends at ordinary rates versus the lower qualified rate Over time,
REITs and the rules and regulations that govern them have evolved to meet the changing needs of the real estate industry and the broader economy.
But throughout that process, REITs have remained true to the mission laid out by Congress in 1960:
to make the benefits of income-producing real estate accessible to anyone and everyone. And that’s still how they work today.
How to buy and sell REIT
You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a broker.
You can purchase shares of a non-traded REIT through a broker that participates in the non-traded REIT’s offering. You can also purchase shares in a REIT mutual fund or REIT exchange-traded fund.
Understand fees and taxes
Publicly traded REITs can be purchased through a broker. Generally, you can purchase the common stock, preferred stock, or debt security of a publicly traded REIT.
Brokerage fees will apply.
Non-traded REITs are typically sold by a broker or financial adviser.
Non-traded REITs generally have high up-front fees.
Sales commissions and upfront offering fees usually total approximately 9 to 10 percent of the investment. These costs lower the value of the investment by a significant amount.
Special Tax Considerations
Most REITS pay out at least 100 percent of their taxable income to their shareholders.
The shareholders of a REIT are responsible for paying taxes on the dividends and any capital gains they receive in connection with their investment in the REIT.
Dividends paid by REITs generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends. Consider consulting your tax adviser before investing in REITs.
REITs: The pros and cons
There are advantages to investing in REITs, especially those that are publicly traded:
Steady dividends: Because REITs are required to pay 90% of their annual income as shareholder dividends, they consistently offer some of the highest dividend yields in the stock market.
That makes them a favorite among investors looking for a steady stream of income. The most reliable REITs have a track record of paying large and growing dividends for decades.
High returns: As noted above, returns from REITs can outperform equity indexes, which is another reason they are an attractive option for portfolio diversification.
Liquidity: Publicly traded REITs are far easier to buy and sell than the laborious process of actually buying, managing and selling commercial properties.
Lower volatility: REITs tend to be less volatile than traditional stocks, in part because of their larger dividends. REITs can act as a hedge against the stomach-churning ups and downs of other asset classes, but no investment is immune to volatility.
Illiquid (especially non-traded and private REITs): Publicly traded REITs are easier to buy and sell than actual properties, but as noted above, non-traded REITs and private REITs can be a different story.
These REITs must be held for years to realize potential gains.
Heavy debt: Another consequence of their legal status is that REITs have a lot of debt. They’re usually among the most indebted companies in the market.
However, investors have become comfortable with this situation because REITs typically have long-term contracts that generate regular cash flow such as leases,
which see to it that money will be coming in to comfortably support their debt payments and ensure that dividends will still be paid out.
Low growth and capital appreciation: Since REITs pay so much of their profits as dividends, to grow, they have to raise cash by issuing new stock shares and bonds.
But investors are not always willing to buy them, such as during a financial crisis or recession.
So REITs may not be able to buy real estate exactly when they want to but when investors are again willing to buy stock and bonds in the REIT, the REIT can grow again.
Publicly Traded REITs in US
Simon Property Group
Digital Realty Trust