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What Is a REIT?

Since 1960, REITs have expanded to foreign countries, such as Brazil.
REITS were established by Congress to open large, income-producing properties to all investors.
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  • Originally Written By: L. S. Wynn
  • Revised By: Bott
  • Edited By: L. S. Wynn
  • Last Modified Date: 01 July 2014
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REIT stands for Real Estate Investment Trust and is a company that owns and usually manages income-producing real estate property such as apartments, offices, and industrial space. Along with meeting additional criteria, to qualify as a REIT in the United States, the company must:

  • pay at least 90% of its taxable income to its shareholders as dividends every year.
  • have at least 100 shareholders.
  • invest at least 75% of its total assets in real estate.
  • derive at least 75% of its income from rent or mortgage interest from properties in its portfolio.

In the United States, Congress established REITs in 1960 to provide all investors with the opportunity to invest in large, income-producing properties; before REITS, it was typically only large institutions and wealthy individuals who could afford to invest in income properties. The stocks of most REITs are freely available on major stock exchanges. They present investors with an efficient method of investing in real estate without the task of being a landlord; each shareholder earns a pro rata percent, meaning a portion of the total of the REIT's profits.

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Global Criteria

Since 1960, the REIT has been introduced to several other countries, including Australia, Japan, and Brazil. The criteria for REITs and other real estate investment vehicles varies by location. For example, in Japan, 50% of a REIT's income must come from real estate, compared to 75% in the US, and a Japanese REIT cannot invest more than 50% of it's shares in other companies. In Australia, 100% of the investment income must be paid to shareholders.

Types of REITS

As of 2009, there were about 170 public REITs that control a total of over $300 billion US Dollars (USD). Many REITs focus on one particular type of property, such as residential or commercial. Some handle the maintenance and management of the properties within their portfolios whereas others use contractors to perform this work. There are generally three types of REITS:

  • Equity: this type of investment owns and manages real estate, particularly rental properties, and earns revenue by collecting rent.

  • Mortgage: mortgage REITS can lend funds for mortgage loans as well as purchase securities that are backed my mortgages. The income from this investment comes from interest earned on the mortgage loans.

  • Hybrid: a combination of the first two types, a hybrid REIT can both own and manage real estate as well as offer financing for mortgage loans and purchase mortgage-backed securities. Revenue is earned from both sources, namely, rental income and interest.

Investment Benefits

Perhaps one of the most attractive aspects of a REIT is the methods in which taxes are handled. REITs are allowed to deduct dividends paid to shareholders from their taxable corporate income, which can frequently remove all tax burdons. Taxes are only paid by the individual investor for the dividends received and any capital gains. Investors can earn dividends that acts as a form of income, and the amount of dividends paid varies between different countries.

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emtbasic
Post 7

@icecream17 - You definitely have many good points in your post, but the one thing that you can't screen for in a REIT is really who is managing it and exactly what the state is of every piece of property in the instrument you buy. That's how we ended up with so much bad paper a few years ago, and we are just digging out from under that.

I guess it's just like everything else, you have to be able to time the market. REITs were a great investment for years, and they may well be one again. We'll just have to wait and see.

BigManCar
Post 6

@Sunny27 - I agree with you. I got out of the REIT market before everything collapsed and have been moving back into tangible properties picked up at "fire sale" prices.

There are a number of headaches associated with being a landlord, of course, but I think this is an unprecedented time to acquire property and really set yourself up for the future. I hope everything works out for you.

icecream17
Post 5

@Sunny27 - I agree, but I think that REIT investors choose to invest in REIT stocks and REIT mutual funds because they don’t want the hassle of being a landlord.

They simply want the profits and when it is time to sell you simply sell. You don’t have to have a real estate agent spend months trying to sell the property and then have to pay a real estate commission.

You also don’t have to worry about property taxes and homeowner’s insurance. I think that there are advantages to both types of real estate investments but it really depends on how much extra time you have because having real estate investment property is not an armchair investment like a REIT mutual fund is.

I think that if you are willing to screen your tenants well and maintain your property then owning a piece of investment real estate can pay off because the renters are actually paying off the mortgage for you.

You can later decide to sell your home for a profit or continue renting for additional cash flow. It really depends on your situation as both types of investments can yield good results.

Sunny27
Post 4

I just wanted to say that I used to own a REIT mutual fund that invested in commercial properties that was paying a high yield of about 4%. I liked holding this fund because the profits from the rentals were reinvested and the yield was a nice benefit.

I got rid of it as the market started to decline and instead I now own investment property. I really like owning tangible property like this because I rent it out and make money from it, but I can also live in the property if I want. You really can’t do that with a REIT.

anon26207
Post 2

I am not sure the requirement to have 100 shareholders to qualify as a REIT in the UK is strictly correct.

debbiekripps
Post 1

my husband and i sold a piece or property last year. our collateral was the mobile home . I have been fighting this for a whole year and can't get anyone to listen to me . we have a jr lien hold on it and were are assignees. lender thinks he owns the mobile it is secured by deed note security agreement and cant get my 34,000, The person that brought the property never made a payment to me or the lender nothing at closing came out of his pocket he collected the rent there for 6 month and made a profit. the man has a bankruptcy and lender knew that at the time what can i do now?

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