Real Estate Investment Trusts

Real Estate Investment Trusts

A real estate investment trust or “REIT,” is an entity that owns and operates a portfolio of real estate properties or mortgages. REITs can be classified into three main categories; equity REITs, mortgage REITs, and hybrid REITs. Equity REITs have ownership of the properties in their portfolios and collect revenue via rent. Mortgage REITs will purchase mortgages, invest in mortgage backed securities, or issue mortgages to property buyers. All of these activities generate revenue via interest on the mortgage payments. Lastly, Hybrid REITs are a combination of equity and mortgage REITs that generate revenue using a combination of both strategies. REIT securities are commonly sold on public exchanges, offering investors access to a liquid means of making real estate investments. It should be noted that some REITs do not trade. In these cases, the REIT itself has certain rules around redemption. It’s very important for the investor to know what these rules are as redemptions outside of those rules is not allowed. Most importantly, the value is also dictated by these rules.

In order for a company to be classified as a REIT, certain rules must be followed. First, the REIT must invest at least 75% of its total assets in real estate. Additionally, the company must gross 75% or more of its revenue through these real estate investments. As aforementioned, these revenues are commonly in the form of the collection of rents or as interest on mortgages. Finally, the REIT must pay out at least 90% of its taxable income to shareholders, usually in the form of dividends. This generous dividend is another attractive feature of a REIT investment.

REITs are tax advantaged investments which avoid double taxation of income. Any dividends distributed by the company are considered tax deductible and vastly reduce the level of taxable income the REIT pays. For example, a REIT that distributes 90% of its net income in the form of dividends will be taxed on only 10% of its total net income as a result of the exemption.
If you are considering an investment in a REIT, it’s highly advisable to seek the advice and counsel of your broker or wealth advisor. REITs can be a very good investment, but probably aren’t for everyone and certainly, the investor should do their diligence.