ReSET Blog
Blog · August 17, 2022 · AUTHOR: Darwin Pelea

What are REITs?

REITs stand for Real Estate Investment Trusts. REITs are types of investments that are owned and operated by income-producing real estate. These investments are traded on major stock exchanges and can be bought and sold like any other stock. When you invest in a REIT, you are essentially investing in a portfolio of real estate assets.

It can be a great way to diversify your investment portfolio and earn a steady income stream. Since REITs are required to pay out at least 90% of their taxable income to shareholders, they offer a high level of dividend income. And because REITs often own a variety of different types of real estate, they can provide diversification against stock market volatility. The REIT aims to generate income and long-term appreciation through investments. In the same way, you can invest in stocks. You can also invest in them through your broker.

How do REITs work?

REITs were established by the Cigar Excise Tax Extension Amendment of 1960 to permit investors to purchase shares in commercial real estate portfolios. Before this amendment, shares in commercial real estate portfolios were only accessible to wealthy individuals. The properties that you may include in the portfolio of a REIT are generally apartments, data centers, hotels, healthcare facilities, infrastructure (e.g., cell towers, fiber optic cables, energy pipelines), retail centers, office buildings, and timberland, self-storage, and warehouses.

REITs typically specialize in a particular field. However, diversified and specialty REITs can specialize in various property types, such as a REIT whose portfolio includes commercial and residential properties. Many REITs are publicly traded on significant bond exchanges so that investors can buy and sell them as stocks all day. These REITs generally trade under considerable volume and are highly liquid. 

Different Types of REITs

There are 3 types of REITs as

Equity REITs:

An equity REIT invests in real estate directly, either through owning property or providing financing for real estate projects. Equity REITs typically own and operate a portfolio of income-producing real estate assets, such as office buildings, shopping centers, apartments, warehouses, and hotels.

Mortgage REITs:

A mortgage REIT provides financing for real estate projects by lending money to developers and investors. Mortgage REITs typically invest in loans secured by real estate assets, such as office buildings, shopping centers, apartments, warehouses, and hotels.

Hybrid REITs:

A hybrid REIT combines an equity REIT and a mortgage REIT. Hybrid REITs typically own and operate a portfolio of income-producing real estate assets and provide financing for real estate projects. 

Shares of REITs are further classified according to how they are purchased and held:

Publicly Traded REITs:

A public REIT is a type of investment trust registered with the SEC and traded on a public exchange. These REITs are available to all investors, regardless of accreditation status.

Public Non-Traded REITs:

While REITs are registered with the SEC, they aren't traded on national securities exchanges. Therefore, they tend to be less liquid than public REITs.  

Private REITs:

A private REIT is a type of investment trust that is not registered with the SEC and is not traded on a public exchange. Instead, these REITs are offered through private placements to accredited investors.

Which Things You Should Note Before Investing In REITs

To fully understand a REIT's strategy and investment objective, you must read its prospectus and research reports.

There are three key areas where you can find information:

  • In addition, it should include information about the REIT manager's track record and experience and its sponsor and pipeline of assets, if applicable.

  • Knowledge of the REIT's geographical and sector exposures, as well as information about the properties to be placed in the REIT.

  • Fees, dividend policy, and other information about investing.

There are many types of REITs, and some may be riskier than others, including regulatory and political risks. You should:

  • Reading the prospectus' sections on "Investment Approach" and "Risks" is essential before investing in a specific REIT. A REIT's risk factors may vary depending on its investment objectives, geographical focus, sector focus, quality of its underlying properties, title (leasehold or freehold), management experience, and distributed income.

  • It would help if you pondered whether the REIT's structure and risk profile are appropriate for your investment time horizon and risk appetite. If you are not comfortable with the investment objective or strategy of a REIT, do not invest in it.

What Are The Benefits Of REIT?

A REIT, or Real Estate Investment Trust, is a type of investment vehicle that allows investors to pool their money to invest in a portfolio of real estate-related assets. REITs can offer several benefits to investors, including:

Diversification:

REITs offer exposure to the real estate market without the need to own property directly. It can add valuable diversification to your portfolio, especially if you don't already have much exposure to real estate.

Passive income:

REITs offer investors a way to generate passive income through dividends. When you invest in a REIT, you are essentially becoming a part-owner of the trust, which means you are entitled to a portion of the profits generated by the trust.

Liquidity:

Liquidity is the ability of an asset to be quickly converted into cash. REITs are highly liquid, which means they can be easily bought and sold on the stock market. It makes them a good investment for investors who want to access their money quickly.

Tax advantages:

When you invest in a REIT, you can enjoy lower taxes on your investment income. It is because REITs are required to pay out at least 90% of their taxable income to shareholders in the form of dividends. And since dividends are taxed at a lower rate than other types of investment income, this can result in significant tax savings for REIT investors.

Lower risk:

REITs tend to be less volatile than other types of investments, meaning they are less likely to lose value in a down market. It is because REITs are required to spread their investments across several properties, which helps diversify their risk.

Which companies qualify as REITs?

  • A minimum of 75% of total assets should be invested in real estate, cash, or U.S. Treasury bonds.

  • Make at least 75% of your gross income from renting real estate, paying mortgage interest, or selling real estate.

  • You must pay out dividends of at least 90% of taxable income every year to shareholders.

  • A corporation must be taxable as an entity.

  • Trustees or directors should manage the organization.

  • Having at least 100 shareholders after the company's first year of operation.

  • The number of individual shareholders should not exceed 50%.

REIT Fraud

REITs that are not registered with the Securities and Exchange Commission (SEC) should not be sold by anyone who tries to do so. You can use SEC's EDGAR system to verify a REIT's registration, whether they are publicly traded or non-traded. EDGAR also enables you to access a REIT's annual and quarterly reports, as well as its offering prospectus."

You should also check into the broker or investment advisor recommending the REIT. The Securities and Exchange Commission offers a free tool that helps you check the investment professional's credentials.

Final Thought

REITs are a type of investment that allows investors to participate in the ownership and operation of income-producing real estate. It offers several advantages, including diversification, income potential, and professional management. By investing in REITs, investors can earn a share of the income generated by the property. This article provides a thorough and complete guide to REITs. 

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