What Is A Real Estate Investment Trust?
A real estate investment trust is a device that permits you to invest in real estate and property but without the usually hassles associated with purchasing such property on your own. A real estate investment trust is a system where a group of investors collectively gather their funds into a legal trust and invest in various forms of real estate. If you’ve ever heard of other investment mechanisms such as mutual funds, you’ll understand the way real estate investment trusts are supposed to work. A real estate investment trust may also be known as a REIT and a REIT invests in different types of property. The different types of property that are invested in may be residential or commercial or even for leisure purposes. Simple REITs may invest in property as a simple as an apartment block or as complex as a group of hotels and leisure parks. Some real estate investment trusts even own shopping centers and movie theatres and it all depends of the purposes of the people who initially set up the real estate investment trust.
Different types of REIT’s exist and some of these trusts are private in nature. A number of these real estate investment trusts are public and can be found on stock exchanges such as the NYSE and the London Stock Exchange. One form of real estate investment trust is the mortgage REIT, which provides a unique service in that it supplies new home owners with money in order to purchase new property. People may also invest in such devices in order to get loans and securities which are backed by these REITs and mortgages. As with any investment device, a certain form of risk is always involved and methods have been created to effectively handle these types of risk. The risks that are associated with a real estate investment trust will vary and can be dependent on a varied number of factors some of which include the location the investments are based in and other factors.
In recent times REITs have increased in popularity due to a different number of reasons. Some people prefer real estate investment trusts because they are associated with factors that they can easily understand. Some people prefer REITs because they are identified with development and growth. Others simply make investments for certain reasons which are often driven by emotional factors. Statistics have shown that some relations exist between the prices of stock and the prices of real estate and profitability of REITs may easily be determined by monitoring for such statistics and varying volatility of stock markets in a particular region.
If you want to invest in real estate but you have often been scared of the problems of tying down all your money in one particular investment, REITs make perfect sense for you. The increased popularity of these devices, the growth of demand for quality real estate on a global scale as well as the opening of new vistas for investment such as the economies of newer countries on the boom such as the UAE and the countries of the former Eastern Bloc of Europe show better times ahead for early investors.
Real estate investment trusts (REITs) is an investment trust where many people invest their money in commercial and residential real estate businesses. The trust manages and possesses many commercial properties and mortgages. The trust also invests in other types of real estate. Real estate investment trusts shows the best characteristics of both real estate and stocks.
Real estate investment trust is a company that operates income producing real estate such as apartments, offices, warehouses, shopping centers, and hotels. Though a variety of property types are there, most of the REITs concentrate on any one of the property types only. Those specializing in health care facilities are called the health care REITs. The real estate investment trust was formed in 1960 in order to make large scale income raising investments in real estate, which can be easily accessed by smaller investors. The trust’s main advantage is that it helps a person to select an appropriate share to invest on from a variety of group rather than investing on a single building or management.
Real estate investment trusts are broadly classified into three categories – equity, mortgage and hybrid. The first category involves the ownership and management of income producing real estate. Mortgage real estate investment trusts offers money directly to real estate owners by acquiring loans or mortgage backed securities. The third category not only owns properties but also provide loans to real estate owners and operators.
Real estate investment trusts differ from limited partnerships in many ways. One of the main differences lies in reporting the annual tax information to the investors and another is that there is no minimum investment amount. For a company to become a real estate investment trust, it should share out 90 percent or more of its taxable income to its shareholders once in a year. Once a company is qualified as an REIT, it is allowed to reduce the dividends given to its shareholders.
Equity Real Estate Investment Trusts
Equity real estate investment trusts invest in and at the same time own properties themselves. Their revenues come mainly from the rents of their properties. These trusts are different from the mortgage property investment firms, which provide mortgage loans to the buyers. They don’t buy existing mortgages and mortgage backed securities. It buys and owns properties rather than investing in the mortgages. The properties are then given on a rent from where they get the principal amount as revenue. If you are investing in an equity real estate investment trust then you will get dividend income from the income earned by the investment trusts from their properties.
Unlike the usual REIT’s who invest in mortgage loans, equity real estate investment trusts invest directly in the physical property. In the regular investment trusts, they invest in mortgage loans i.e. they provide loans to people who are willing to invest in the property. They will be repaid back the money along with interest, which becomes their profit. They will carefully select the right people who deserve a qualified mortgage loan and invest on them who in turn buy property and pay back the money to the REIT along with interest.
But when it comes to investment trusts, they don’t invest in the mortgage loans and make money. In turn they invest the money in buying the property themselves and giving it for rent. They make profit from the rent that they get and their principal revenue is the rent that they get. One can invest in the equity real estate trusts and help them buy more property. From the rent that they get from the property they bought, you will earn a dividend share of it. The equity real estate trusts buy the property by investing their own money along with the investor’s money that is ready to invest in the properties.
Most of the time equity investment trusts are viewed as partial substitutes for the conventional property investments. The actual correlation between the equity real estate investment trusts and traditional property returns are insignificant. The primary focus on profits of the equity investment firms is through the acquisition and management of the direct physical property. Whereas for the conventional investment trusts the prime focus of profits is from the interest paid for the mortgage loans. In equity investment trust there is direct ownership on the property, whereas in the conventional REIT there is no ownership existing.
The risk involving in the investment in REIT depends on the type you choose. When it comes to investing in equity real estate investment firms there is a potential for investment returns because of- appreciations in the value of the owned property, inflations resulting in the driving up of rents unlike in stable mortgage returns, healthy dividend payments which increase over time, and there are profits whether it is from sale or buying of the properties. When it comes to the profits earned by the REIT’s, which give mortgage loans, they do produce significant returns but they carry added risks as they hold only debt instruments and not property.
Equity real estate investment firms are not taxed at the corporate level as they pay out 90% or more of their profits as dividends to their investors. There is much equity REIT’s to invest in and make sure that your money is in the safe hands. With the equity real estate investment trusts, proceed with caution but do proceed!
Real Estate Investment Trusts
Royalty trusts, in Finance, are classic flow-through investments vehicles. The trust, like a mutual fund, holds a portfolio of assets, which can be anything from producing oil and gas wells to power generating stations to interests in land. The net cash flow, i.e. the total cash flow minus revenues, is passed on to the unit-holders as distribution.
The purpose of a Real Estate Investment Trusts is to reduce or eliminate corporate income taxes. In the United States, where they are generally more widespread as investment vehicles, Real Estate Investment Trusts pay little or no federal income tax but are subject to a number of special requirements set forth in the Internal Revenue Code, one of which is the requirement to distribute annually at least 90 percent of their taxable income in the form of dividends to shareholders.
Real Estate Investment Trusts are, therefore, a special type of royalty trust. They specialize in real property, anything from office buildings to long-term care facilities. For illiquid assets like real estate, closed-end funds of this type make good sense. Open-end or ‘mutual’ real estate funds are subject to new money and redemption problems, entirely absent in closed-end trusts. The first Real Estate Investment Trust was introduced in the United States in 1960. The vehicle was designed to facilitate investments in large-scale income-producing real estate by smaller investors. The US model was simple, enabling small investors to acquire equity interests in vehicles holding large-scale commercial property.
But the birth of Real Estate Investments Trusts as a mass investment vehicle can be traced directly to the liquidity crisis encountered by open-end real estate mutual funds all the way back to 1991-92, during the slowdown of real estate that characterized those years. Faced with redemption demands on the part of unit-holders, real estate mutual funds were presented with the unpalatable option of selling valuable real properties into a distressed market to raise cash. Many of them, therefore, chose to close off redemptions and converted into Real Estate Investment Trusts, since then most commonly known as REIT’s. Only a few open-end real estate mutual funds continue to own real estate directly. Most now invest in shares of real estate-related companies.
The typical REIT usually distributes about 85 to 95 percent of its income (rental income from properties) to the shareholders, usually on a quarterly basis. This income gets a special tax break, because REIT’s shareholders are entitled to a deduction for the pro-rata share of capital cost allowance (depreciation on the real properties). As a result, a high percentage of the distributions are normally tax-deferred. However, the amount will vary from year to year and will differ depending on the particular REIT.
As with royalty trust, the value of tax-deferred income will reduce the adjusted cost base of the shares owned. For example, if an investor purchases 1,000 units at $15.50 per unit, receives $3,000 ($3.00 per share) in aggregate tax-deferred distribution over time, and the sells the shares for $17.50 each, the capital gain will be calculated as follows:
[1,000 x ($17.50 – $15.50 + $3.00)] = $5,000 before adjustments for commissions. In Canada, this gain will be subjected to capital gain treatment, so only 50 percent or $2,500 will be included in income and taxed accordingly. In fact, Canada allows preferential tax treatment to REIT’s by making them RRSP-eligible and by not considering them foreign property (which would taxed at a higher rate), so long as the real estate portfolio does not contain non-Canadian property in excess of the allowable limit.
REIT’s yields and the market price of units tend to be strongly influenced by interest rates movements. As rates drop, prices of REIT’s rise thus causing yields to drop. On the other hand, when interest rates rise, prices of REIT’s drop thus causing yields to rise.
For example, when interest rates were pushed up by both the Federal Reserve Board and the Bank of Canada all the way back in 2000, the typical REIT was yielding close to 14 percent as prices per share fell. When interest rates subsequently dropped, yields fell to less than 10 percent as demand for REIT’s increased thus pushing share prices higher.
This is a very important consideration to be kept in mind when investing or otherwise trading units involving this type of trusts. If interest rates appear to be poised to rise, investors may want to defer purchases, and those who own this type of shares already may consider reducing their exposure by selling and take in some profit.
There are typically two catches with REIT’s. The first is that since investors are ‘unit-holders’ rather than shareholders, they are potentially jointly and severally liable together with all other unit-holders (plus the trust itself) in the eventuality of insolvency. Instead of limited liability, investors rely on the REIT’s management to have property, casualty and liability insurance, prudent lending policies and other reasonable safeguards in place. Nevertheless there is always the possibility of a problem – say a catastrophic fire or a building collapse – that is not covered by insurance. This may have seemed like a very small matter prior to the attacks on the World Trade Center in 2001. Since then, however, it is something that has to be taken seriously.
The second problem with REIT’s is less transparent. All real estate properties depreciate in value over time (not the land, only the buildings). Depreciation can be somewhat slowed down by earmarking at times significant amounts of money for maintenance and renewal of facilities. Since most of the REIT’s income is being distributed and the capital cost allowance is being allocated to investors, investors are factually getting their own capital back over time. As such, the book value of the underlying real properties will be steadily depleting.
Obviously, if real estate markets are on the upswing the depreciation factor will not be overly important, since it will be offset by the appreciation of the underlying assets. But in essence, the point is that the long-term income stream is quite variable, certainly more variable than some managers would have investors believe.
As stated above, the inverse relationship between interest rates and prices of REIT’s shares plays an important role. On average, it is safe to assume that interest rate increases are likely to be met by REIT’s price declines in the Stock Exchange, because increasing rates correspond to a slowdown in the economic growth and less demand. But out of the context of the frantic buy and sell of Wall Street, even a slowdown in the market for single-family houses can actually benefit REIT’s. This is so, because even though real property prices are in decline, it is still cheaper to rent than to own, especially during a period of rising interest rates. And REIT’s thrive on rentals. In fact, no city is a better environment for REIT’s to operate in than New York City, where some 70 percent of residents rent.
Understanding Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust (REIT) works as an investment company that controls the possession and management of revenue generation of real estate properties. Investing through REITs will allow you to claim several tax benefits and thus obtain a higher income from your real estate investments.
The following are the different types of REITs based on the type of real estate investment.
- Equity REITs
These are trusts that own properties and generate their income from the rent paid for the property.
- Mortgage REITs
These are the trusts that provide loans to property owners in return for a mortgage on a property. Mortgage REITs also buy mortgages and mortgage-backed securities, and get their revenue from the interest collected on mortgage loans.
- Hybrid REITs
Hybrid REITs are trusts that generate their revenue from rent, like equity REITs, as well as interest on mortgages, like mortgage REITs.
- Retail REITs
These are investment trusts that own and operate commercial ventures like shopping malls and industries. They earn their revenue by leasing out these properties to retail tenants.
- Health Care REITs
These are trusts that invest in health care centres like hospitals, nursing homes, and retirement homes. Most health care REITs lease their properties to third-party managers who, in turn, pay them a fixed rent along with operational and maintenance costs.
- Office REITs
Office REITs lease out buildings for official purposes, generally for a long time. They generate long-term revenue from the rent paid by these offices.
How Does a REIT Function?
A Real Estate Investment Trust needs to invest more than 75% of its total assets in real estate. For a REIT to be legal, it must have at least 100 investors. At least 90% of the profits earned by a REIT in its real estate ventures must be distributed among the investors. The REIT also cannot sell more than 50% of its stocks to 5 or less investors during the first half of a taxable year.
REIT is merely a pass-through entity which allows investors to purchase equity and transfer the profits to the shareholders. Since it is a pass-through entity, REIT is not taxable under federal or income tax laws. It is considered the duty of the shareholders to pay the taxes for their profits, as this is a source of income for them.
How to Invest in a REIT?
Anyone can invest in property through REITs without actually being a property owner. REIT shares offer liquidity, which means they can be sold and purchased easily. A REIT functions as a public sector market for investments in real estate.
Investing in REITs is similar to investing in any other venture or business. You invest by buying stocks or shares of a particular company and then receive a percentage of the profit earned by that company. The money that comes in from the different investors is used by the REIT to invest in a lucrative real estate deal. The profit that it earns from that venture is then distributed between the investors.
What Are Real Estate Investment Trusts?
An investment trust where a group of people invest their money in residential or commercial real estate business is called Real Estate Investment Trust (REITs). These trusts own and manage large number of mortgages and commercial properties. These trusts in fact show the best features of both stocks and a real estate.
Real estate investment trust as a company manages the operations of income generating commercial properties like warehouses, hotels, shopping centers and apartments. Though there are different varieties of properties available, many of these REITs specialize and concentrate on any one kind of properties only. Those of these which have specialization in health care are known as health care REITs. These trusts were formed in 1960 to enable large scale investments in the property sector, which can then be accessed by individual investors. The main advantage of these trusts is that they help person in selecting a share to invest in from variety of a group instead of making an investment in a single large estate or building.
These trusts are mainly classified into three categories: hybrid, equity and mortgage. The first category are those which own properties and also grant loans to owners of property. The second category consists of management and ownership of income generating properties. The mortgage investment trusts are those which provide money to owners of property by acquiring their loans and mortgage backed securities.
These investment trusts are quite different from limited partnerships in several ways. One of the major difference is in the way to report the annual information on tax to their investors.
In order to become a real estate investment trust, a company should share 90 percent or more of its taxable income among its shareholders once every year. Once the company gets qualified as REIT, it can reduce the dividends which it remits to its shareholders.
What is a Real Estate Investment Trust
“Well, real estate is always good, as far as I’m concerned.” -Donald Trump
A real estate investment trust, or REIT, is a company that sells real estate but allows the public and individual investors to buy shares. REITs are just like any other stock option which represents a company. However, there are two defining features of real estate investment trusts which make it a great investment opportunity. The first feature is that it’s only business is coordinating and monitoring property investments. The second feature is that it has to hand out its profits in the form of dividends.
The reason why real estate investment trusts are so popular is that having the REIT status means that corporate tax is not applied to the business. When non REIT companies make a profit they must pay taxes first and then disturb what is left. However, real estate investment trusts do not get taxed and therefore can distribute all the profits made in the form of dividends to their investors. If you have a large principle which you can invest, real estate investment trusts may be a great option for you. If you are interested in REITs contact a financial advisor who can point you in the right direction and offer advice on how to pick the perfect REIT for you.
REITs are great if you are interested in making an income and living off your investments. REITs have a similar status of high yield bonds in profit producing power and rate of return. Remember, both REITs and high yield investments are high risk which is why they can be, if all goes well, extremely profitable. Real estate investment trusts can be affects by th same factors which influence the stock market and the economy. These may include supply and demand, interest rates, inflation, and deflation. A rise in interest rates is a good indicator of a slowly growing economy. This is great for people invested in REITs because it means that businesses are growing and looking to rent or buy more space. The same is true with residential housing. When the economy is doing well people want to buy homes, apartments, and condos.
REITs are companies that reap the benefits of no corporate tax by managing real estate properties and paying out the majority of their profits in dividends. Dividends can offer an extremely large and stable income which can be much more then the returns from Treasury options or even small cap stocks.
Regulations Guiding IRA Real Estate Investment Trust
IRA Real Estate Investment Trust is a way for individuals to invest in properties as a long term retirement opportunity with less tax penalties and risk. Purchasing shares of a Real Estate Investment Trust (REIT) is a good way to diversify a retirement portfolio. Understanding REITs and the guidelines they need to follow will help you determine if this is the type of investment for your IRA.
IRA Real Estate Investment Trust corporations are closely regulated and have specific guidelines they need to follow:
- REITs are requires to pay our 90% of their net income to shareholders
- REITs must have a minimum of 100 shareholders and no more than 50% of shares can be held by 5 or less individuals
- REITs must be managed by a board of directors
- REITs must invest at least 75% of their total assets in property assets and derive 75% or more of their revenue from interest on mortgages or real property
Other important information investors should know when dealing with IRA REITs is that they should expect a rate of return of approximately 6-12% on their investment, sometimes more depending on the type of property the REITs invest in and how well they are managed. These are liquid assets and are easier to transfer than deeds or other investments. And investment analysts recommend that if an individual wants to venture into property trusts then they should invest between 10-30% of their portfolio in REITs.
While REITs are newer and do not have the standard measurements of performance as other businesses, there are ways to research this type of organization to make sure they are a worthy investment. Ask for their track record, request referrals, and speak with fellow investors about their experiences. Many Real Estate IRAs and Real Estate IRA custodians have experience with REITs and can offer advice as to which ones are best for your needs and the type of IRA you hold.
IRA Real Estate Investment Trusts offer low risk, decent return, and long term investment for your retirement portfolio. REITs are strictly regulated to ensure that these corporations pass the majority of their income to shareholders. With a 6-12% return on investment, REITS offer a better rate of return than many other ventures, helping individuals reach their retirement goals.