Everything You Should Know About Real Estate Investment Trust

Published On - August 12, 2019

Though real estate investments offer great benefits, they don’t guarantee fixed returns. Holding an investment for a long time may result in rising maintenance expenditure on the property, which increases an investor’s liabilities. To give investors a flexible and more secure investment structure, REIT investment was introduced in the United States.

What is a REIT?

A Real Estate Investment Trust or REIT is a company that owns, and in most cases, operates income-producing properties. Akin to mutual fund investment, REITs allow investors to invest in a more flexible and secure investment structure. The majority of REITs lease spaces to tenants and receive rents on those properties. That’s their main source of income.  On the other hand, some REITs lend money to real estate investors and invest in mortgage and mortgage-backed securities.

How a REIT is formed?

A company must fulfill the following requirements to form a REIT –

  • The company must invest 75% of its assets in real estate or treasuries.
  • The company must receive 75%  of its income through rents, sale of its real estate or from interests on the mortgages.
  • The company must distribute 90% of its income among its shareholders.
  • The company must have at least 100 shareholders after one year of its existence.
  • The company must be taxable as a corporation.
  • Not more than 50% of the company’s shares should be held by its five or fewer shareholders.
  • The company must be managed by a board of directors or trustees.

Benefits of REIT Investment –

  • Transparency – REITs are highly transparent as they disclose the capital portfolio annually and half-yearly.
  • Easy to buy and sell – A REIT’s shares can be easily purchased and sold on the National Stock Exchange. The majority of REITs are listed with the Securities and Exchange Commission and trade on the National Stock Exchange.
  • Higher Dividend – This kind of investment offers a higher dividend to investors as a REIT must distribute 90% of its taxable income among its shareholders.
  • Lower Risk – REITs have lower liquidity risk as compared to direct real estate investment.

Types of REIT –

  • Equity REITs – These kinds of REITs lease spaces to tenants and receive rents on those properties. This is the main source of earning of an Equity REIT. You can invest in Equity REITs just like you buy stocks of other companies.
  • Mortgage REITs (mREITs) – Mortgage REITs work differently. They don’t lease spaces to tenants, instead, they lend money to real estate investors and earn interests on the mortgages and mortgage-backed securities.
  • Hybrid REITs – These kinds of REITs function both ways. They lease spaces to tenants as well as lend money to real estate investors.

What’s the right time to invest in REITs?

There is no so-called right time to invest in REITs. REIT investment can be planned anytime in a calendar as it provides the same benefits irrespective of the time when the investment is made. However, you may want to consult your financial advisor or a REIT expert before investing in REITs.

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1031 Risk Disclosure:

  • There is no guarantee that any strategy will be successful or achieve investment objectives;
  • Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
  • Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
  • Potential for foreclosure – All financed real estate investments have potential for foreclosure; ·Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments;
  • Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
  • Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits


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