A Real Estate Investment Trust, or REIT, is a company that owns and manages real estate.
Investors buy shares of REITs like they do stocks. They are sometimes even called “Real Estate Stocks,” and are similar to mutual funds in structure.
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Pros and Cons of REIT
|Investing in real estate without the headaches of owning properties||Stock market risk exposure|
|Income distribution—90% of taxable income distributed to shareholders each year||Take on a lot of debt|
|Tax advantages—allowed to deduct the dividends they pay out||Some taxed at ordinary income|
|Protection against inflation||Slower growth than other funds (since they pay out 90% of income instead of reinvesting it)|
Qualifications for a REIT
- Requires a minimum of 100 shareholders
- Exactly 50% (not higher) REIT shares owned by five (or fewer) individuals
- Nearly 75% of total assets are invested real estate
- Nearly 75 % of gross income must be received from rents, real property, interest mortgages financing, property, or real estate sale
- Nearly 90% of taxable income paid in shareholder dividends annually
- Legally recognized as a business entity (under IRS operations rule) so that it is a taxable corporation
- Actively managed by a board of directors or real estate trustees due to changing economic factors
Types of REITs
- Equity REITs—buy property so that revenue is earned from increase in property value and payments from renters.
- Mortgage REITs—invest in debt (mortgages) so that revenue comes from interest on these investments.
- Hybrid REITs—combines the approach of both Equity REITs and Mortgage REITs; owns both real estate and the debt instruments.
- Many people think McDonald’s is a fast-food restaurant, but it actually owns one of the world’s largest real estate portfolios.
- Jeff Bezos is not only the billionaire founder of Amazon but also a real estate tycoon who has amassed nearly 300,000 acres of land across the country.
- According to real estate site Zillow, the White House is valued at approximately $388 million (and not for sale!).
Mark Anson, Frank Fabozzi & Frank Jones.
“The Handbook of Traditional and Alternative Investment Vehicle: Investment Characteristics and Strategies.” Wiley Press. 2011. Chapter 15, Page 300– 311.
Morningstar. “The Role of REITs in a Portfolio.” 2015.