Real Estate Investment Trust – Who should invest?

Published On - August 2, 2019

A Real Estate Investment Trust is a company or trust that owns, and in most cases, operates real estate properties. REITs allow investors to invest in income-producing properties without the burden of going out and purchasing those properties. The business model of a REIT varies depending upon what kind of REIT it is. The majority of REITs make money by leasing spaces to tenants and then collect rents on those properties. A REIT’s benefits are akin to that of a mutual fund investment.

How a REIT is formed?

To form a REIT, a company must fulfill the following requirements –

  • The company must invest 75% of its assets in real estate.
  • The company must earn 75% of its income through the sale of its real estate.
  • The company must have at least 100 shareholders.
  • The company must be taxable as a corporation.
  • The company must be administered and regulated by a Board of Directors or trustees.
  • The company must distribute 90% of its income among its shareholders.

Which REIT Investment is better?

There is no thumb rule for investing in REITs. Depending upon the objective behind the investment, an investor can invest in any of the following REITs –

  • Equity REITs – This kind of REIT leases spaces to tenants and then collects rents on those properties. The majority of REITs are Equity REITs. The main source of income of Equity REITs is the rent they receive by leasing spaces.
  • Mortgage REITs (mREITs) – Mortgage REITs have an entirely different business model. Instead of leasing spaces to tenants, these REITs finance loans to real estate investors by investing in mortgages and mortgage-backed securities.
  • Hybrid REITs – A mixture of Equity and Mortgage REITs is known as a Hybrid REIT. These kinds of REITs lease spaces to tenants as well as lend money to real estate investors.

The majority of REITs are listed with the Securities and Exchange Commission (SEC) and trade on the National Stock Exchange. However, some REITs that don’t trade on the National Stock Exchange or are not listed with the Securities and Exchange Commission. Private and Non-Publicly Traded REITs are a few to name.

REITs require a long-term commitment, investors eyeing short-term benefits should stay away –

What a REIT investment requires from you is a long-term commitment. Just like a mutual fund investment, a REIT investment gets better and better along with time. It may not suit investors who are looking for short-term investment options. A REIT’s large structure makes it suitable for small investors as the entry cost is usually on the lower side that may start from as low as $500 or the price of one share. Therefore, anybody looking for a secure and stable flow of income can invest in REITs.   

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Perch Financial LLC and Emerson Equity LLC do not provide legal or tax advice. Securities offered through Emerson Equity LLC Member FINRA/SIPC and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein. 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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