Our Thoughts

What are REITs and How Do They Work?

REITs, or real estate investment trusts, are an investment instrument that finances, operates, or owns real estate that produces income for its investors.

More than 80 million Americans invest in REITs either directly, through mutual funds, or through exchange-traded funds.1 Institutional investors — pension funds, foundations, insurance companies, as well as banks — also own a piece of the REIT action.

Types of REITs

The most common publicly traded REITs are equity REITs. Equity REITs own and typically operate real estate that produces income for investors. Next, there are mortgage REITs that finance income-producing real estate by originating or actually purchasing mortgages. Mortgage REITs earn income from the interest on those investments. “Publicly traded” means they trade on a public stock exchange such as the New York Stock Exchange or NASDAQ.

Then there are public non-listed and private REITs. Public non-listed REITs do not trade on the stock exchange but are registered with the SEC. Private REITs are exempt from SEC registration, and their shares do not trade on the stock exchange.

Regardless of type, all REITs are required to pay out at least 90 percent of their taxable income as dividends to their stockholders. REIT shareholders must pay the income taxes on those dividends.

How to Qualify as a REIT

The criteria for a company to be designated as a REIT are as follows:1

  • The company must be an entity taxed as a corporation and managed by a board of directors/trustees.
  • The company must have at least 100 shareholders with no more than 50% of its shares held by five or fewer investors.
  • At least 75% of the company’s assets must be invested in real estate.
  • At least 75% of the company’s income must come from rents, mortgage interest financing real property, or from real estate sales.
  • Shareholders must receive at least 90% of the company’s taxable income in the form of annual dividends.

Advantages of Investing in a REIT

REITs have a historically competitive return on investments. Those returns are based on a consistent, high dividend income as well as long-term capital appreciation.2 REIT investments can further diversify investment portfolios.

Liquidity and Transparency

In addition to substantial and stable dividend yields, REITs offer investors liquidity in trading on the stock exchange (for publicly traded REITs). Investors will also enjoy transparency as independent fund directors, auditors, and analysts — along with financial media gurus — monitor REIT performance.

REIT for the Average Investor

REITs allow anyone to invest in commercial real estate using the same tools that they invest in other financial sectors. Investors can purchase stock of individual companies or invest through a mutual fund. Without actually having to go out and buy, manage, or engage in complicated financing deals, REIT investors can earn a share of the income produced in the high-value commercial real estate market.

 

Other Reads:

4 Easy Tricks to Avoid Getting Emotional About Your Investments

Look Before You Leap! How to Handle Company Stock in Your 401(k)

Take This Advice to Heart: Your Wellness and Wallet Are Linked

I’m Ready to Start Investing! How do I Start?

 

https://www.reit.com/what-reit?gclid=CjwKCAiA45njBRBwEiwASnZT53cq6SYj3UKFZMUrc4U1CAcGXkQwLijs9BeQByoTQlOe02ABtz2PRxoCGb8QAvD_BwE

https://www.suredividend.com/high-yield-reits/

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.