What is a ‘Real Estate Investment Trust – REIT’
A real estate investment trust, or REIT, is a company that owns, operates or finances income-producing real estate. For a company to qualify as a REIT, it must meet certain regulatory guidelines. REITs often trades on major exchanges like other securities and provide investors with a liquid stake in real estate.
BREAKING DOWN ‘Real Estate Investment Trust – REIT’
REITs are not a new financial innovation. Established by Congress in 1960 as an amendment to the Cigar Excise Tax Extension of 1960, REITs operate in a manner comparable to mutual funds as they allow for individual investors to acquire ownership in commercial real estate portfolios that receive income from properties such as apartment complexes, hospitals, office buildings, timber land, warehouses, hotels and shopping malls.
Most REITs specialize in a specific real-estate sector – for example office REITs or healthcare REITs. Within this space, REITS must purchase and operate its holdings as a part of its portfolio. In most cases, REITs operate by leasing space and passing on collected rent payments to its investors in the form of dividends.
A company must meet the following requirements to be qualified as a REIT:
Invest at least 75% of its total assets in real estate, cash or U.S. Treasuries
Receive at minimum 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
Pay a minimum of 90% percent of its taxable income in the form of shareholder dividends each year
Be an entity that is taxable as a corporation
Be managed by a board of directors or trustees
Have a minimum of 100 shareholders
Have no more than 50% of its shares held by five or fewer individuals
Different REIT Categories
REITs typically fall within three categories.
Most REITs are equity REITs. Equity REITs invest in and own income-producing real estate properties and give investors the opportunity to invest in these portfolios. They must distribute at least 90% of the portfolio’s income to its shareholders in the form of dividends.
Mortgage REITs invest in and own property mortgages. These REITs loan money to real estate owners and operators not only for mortgages but also for different types of real estate loans or through purchasing mortgage-backed securities. Their earnings are generated primarily by the net interest margin, the spread between the interest they earn on mortgage loans and the cost of funding these loans. This model makes them potentially sensitive to interest rate increases.
Hybrid REITs invest in both properties and mortgages.
How to Invest in REITs
Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. Some REITs are SEC-registered and public, but not listed on an exchange; others are private.
Many REITs will invest specifically in one area of real estate—shopping malls, for example—or in one specific region, state or country. Others are more diversified. There are several REIT ETFs available, most of which have fairly low expense ratios. The ETF format can help investors avoid over-dependence on one company, geographical area or industry.
(Information from https://www.investopedia.com/terms/r/reit.asp)
What is ‘REIT ETF’
REIT ETF is exchange-traded funds that invest the majority of assets in equity REIT securities and related derivatives. REIT ETFs are passively managed around an index of publicly traded real estate owners; indexes may vary from provider to provider but two popular benchmarks are the MSCI U.S. REIT Index and the Dow Jones U.S. REIT Index, both of which cover about two-thirds of the aggregate value of the publicly-traded REIT market domestically. REIT ETFs are characterized by their above-average dividend yields.
(Information taken from https://www.investopedia.com/terms/r/reit_etf.asp)
List of Real Estate Investment Trusts
CLICK HERE to get a list of real estate investment trusts
Real estate investment trusts are a way for an investor to start getting into the real estate market without putting down a 30% down payment.
With any investment there is risk, so do your research and see if investing in REITs is right for you!
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