Commercial Real Estate is a great investment; however, it is financially out of reach for many individuals. REITs, also known as real estate stock, are Real Estate Investment Trusts which were created by Congress in 1960 to enable smaller investors to invest in large-scale, income-producing real estate.
REITs are corporations that own and manage a portfolio of real estate and mortgages of which anyone can purchase shares. REITs offer the benefits of owning real estate without the headaches and liability exposure of being a landlord.
REITs provide diversity and liquidity; they are easy to sell quickly. Investing in a portfolio rather than a single property reduces your financial risk. Dividends tend to be larger because a REIT must distribute at least 90 percent of its taxable income to shareholders each year.
As pass-through entities, many REITs pay out 100 percent of their income. A pass-through entity can deduct the dividends from their corporate income; therefore, they are not required to pay corporate federal or state income taxes. They pass the income tax paying responsibility onto their shareholders; however, they cannot pass through losses to investors.
Requirements of REITs
There are other requirements a corporation must meet in order to qualify as a REIT and maintain pass-through status, including:
• Being structured as a corporation or business trust
• Being managed by a board of directors
• They must have at least 100 shareholders
• They must offer fully transferable shares
• Pay out annual dividends of at least 90 percent of their taxable income
• Hold at least 75 percent of their total assets in real estate
• Derive at least 75 percent of their gross income from rents or mortgage interest
• Have no more than 50 percent of thier shares held by five or fewer individuals during the last have of each taxable year
• Have no more than 20 percent of their assets in taxable REIT subsidiaries
Types of REITs
REITs are a diverse industry containing three main categories: equity, mortgae and hybrid.
Equity REITS: EREITs purchase, own and manage income-producing properties like apartment buildings, shopping centers, warehouses and office buildings, to name a few. Equity REITs are operated as part of a portfolio rather than purchased for resale as with typical real estate developers. EREITs are great for long-term investing because they earn dividends from income as well as capital gains from sales.
Mortgage REITs: MREITs loan money to real estate owners for mortgages or they purchase existing mortgages and mortgage back securities. Their income is generated by the interest earned on commercial and residential loans.
Hybrid REITS: HREITS are a combination of equity REITs and mortgage REIT. They own property and make loans to real estate owners; therefore, earning their income through rents and interest.
REITs can be built for a single development project and set up for a specified term, and then they are liquidated with the proceeds being distributed to the shareholders.
Other Classifications of REITs
Other classifications of REITs are Closed-end, which can only issue shares to the public once. They are only allowed to issue additional shares which dilutes the stock if the shareholders approve it. Open-end REITs can issue and redeem shares at any time.
Some REITs invest in a variety of property types in many locations while others focus their investments only in certain area or property types. A REIT may hold property in many geographical areas but only invest in apartments, industrial properties or health care facilities, for example.
Purchase Classifications of REITs
There are three major classifications on how REITs are purchased: private, publicly traded and non-exchange traded.
Private REITs are not registered with the Securities and Exchange Commission. They raise equity from individuals, trusts or other entities that are accredited under federal securities laws.
Publicly traded REITs are registered with the SEC and traded in major stock exchanges. Publicly traded REITs are easy for investors to buy and sell.
Non-exchange traded REITs are also registered with the SEC; however they are not traded on the public stock exchanges. They are sold to investors by private sponsors.
There are many different types of REITs; all offer the benefits of investing in large-scale, income-producing real estate without owning property as a landlord. REITs offer the benefit of diversity and liquidity, relatively larger dividends and relatively low financial risk.
This article was written by Robert Shumake, CEO of Inheritance Capital Group, LLC and founder of https://reitbuyer.com/ an online service for people who wish to invest in real estate without the headaches and liability exposure that go with being a landlord. Visit Robert’s website to learn more about Real Estate Investment Trust.