The Basics of REITs | REIT.com
The Basics of REITs
What is a REIT?
A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types stable income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.
REITs allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock. In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy or finance property. Learn more.
Why were REITs created?
Congress created REITs in 1960 to make investments in large-scale, income-producing real estate accessible to average investors. Congress decided that a way for average investors to invest in large-scale commercial properties was the same way they invest in other industries — through the purchase of equity. In the same way shareholders benefit by owning stocks of other corporations, the stockholders of a REIT earn a pro-rata share of the economic benefits that are derived from the production of income through commercial real estate ownership. REITs offer distinct advantages for investors: portfolio diversification, strong and reliable dividends, liquidity, solid long-term performance and transparency.
How does a company qualify as a REIT?
In order for a company to qualify as a REIT, it must comply with certain provisions within the Internal Revenue Code. As required by the Tax Code, a REIT must:
Be an entity that is taxable as a corporation
Be managed by a board of directors or trustees
Have shares that are fully transferable
Have a minimum of 100 shareholders
Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year
Invest at least 75 percent of its total assets in real estate assets
Derive at least 75 percent of its gross income from rents from real property or interest on mortgages financing real property
Have no more than 25 percent of its assets consist of stock in taxable REIT subsidiaries
Pay annually at least 90 percent of its taxable income in the form of shareholder dividends
How many REITs are there?
As of Jan. 31, 2014, there were 204 REITs registered with the Securities and Exchange Commission in the United States that trade on one of the major stock exchanges — the majority on the New York Stock Exchange. These REITs have a combined equity market capitalization of $719 billion.
Additionally, there are REITs that are registered with the SEC but are not publicly traded, and REITs that are not registered with the SEC or traded on a stock exchange. Internal Revenue Service shows that there are about 1,100 U.S. REITs that have filed tax returns.
What Types of REITs are there?
The REIT industry has a diverse profile, which offers many investment opportunities. REITs often are classified in one of two categories: equity or mortgage.
Equity REITs mostly own and operate income-producing real estate. They increasingly have become real estate operating companies engaged in a wide range of real estate activities, including leasing, maintenance and development of real property and tenant services. One major distinction between Equity REITs and other real estate companies is that a REIT must acquire and develop its properties primarily to operate them as part of its own portfolio rather than to resell them once they are developed.
Mortgage REITs mostly lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Today’s Mortgage REITs generally extend mortgage credit only on existing properties. Many mortgage REITs also manage their interest rate and credit risks using securitized mortgage investments, dynamic hedging techniques and other accepted derivative strategies.