What is a REIT?

What is a REIT?

What is a REIT? A real estate investment trust (REIT) is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs typically pay out all of their taxable income as dividend to shareholders.

REITs allow anyone to invest in portfolios of large-scale properties the same way individuals invest in other industries via the purchase of stock. Stockholders of a REIT earn a share of the income produced through real estate investments without actually having to go out and buy or finance the property.

Types of REITs

Most REITs are traded on major stock exchanges, but there are also public non-listed REITs (which do not offer the same liquidity that stock exchange-listed REITs provide) and private REITs (which are not traded or registered). The two main types of REITs are equity REITs (which generate income through the collection of rent and from sales of the properties that they own) and mortgage REITs (which invest in mortgages or mortgage-backed securities tied to commercial and/or residential properties).

REITs typically provide high dividends plus the potential for moderate long-term capital appreciation. Long-term total returns of REIT stocks are likely to be somewhat less than the returns of higher-risk, high-growth stocks and more than the returns of lower-risk bonds.

REITs are tied to almost all aspects of the U.S. economy, including apartments, hospitals, nursing homes, offices, shopping malls, student housing and timberland. U.S. REITs have become a model for REITs around the world and more than thirty countries around the world have adopted REIT legislation.

Qualifying for a REIT

To qualify as a REIT, a company must:

• Invest at least 75 percent of its total assets in real estate;
• Derive at least 75 percent of its gross income from rents of real property, interest on mortgages financing real property and from sales of real estate;
• Derive at least 95 percent of its gross income from interest, dividends, rents from real property and gain on the sale of stock, real property interests or interests in real estate mortgages;
• Pay at least 90 percent of its taxable income on the form of shareholder dividends each year;
• Be taxable as a corporation;
• Be managed by a board of directors or trustees;
• Have a minimum of 100 shareholders, with no more than 50 percent of its shares being held by five or fewer individuals

In short, REITs offer investors a number of benefits such as diversification, dividends, liquidity, performance, and transparency.