A Real Estate Investment Trust or REIT is a company or corporation that purchases, manages, develops and sells the real estate assets. It is a tax designation which allows investors to acquire real estate in a tax efficient manner. REIT uses the pooled capital of investors to buy and manage income property and sometimes, mortgage loans. It is a way for investors to invest in property and real estate. It can be commercial real estate, homes, condominiums, apartments, offices and industrial places.
REITs specifically invest in real estate or properties that can produce profit and pass on the profit to investors. They are required to distribute at least 90% of their taxable profit or income annually, to qualify for preferential tax treatment into the hands of investors or shareholders. They are also required to invest at least 75% of their total assets in real estate as well as generate similar amount of contribution from mortgages or investments on real estate.
In REIT, a group of investors or shareholders collect their funds into a legal trust to invest in various forms of real estate. It is an investment vehicle established for the benefit of these investors. They act as pass through entities which means that they are designed to pass profits to investors.
Types of REITs
While many REITs invest directly in properties or real estate, some types of REITs also can invest in loans related to real estate, mortgages. There is another type of REITs which can invest in a combination of real properties and mortgages. According to this, REITs come in three basic flavors:
Equity REITs
Equity REITs is the most common type of REIT which invest in and own real estate and make money for investors from the collected rents. They invest in commercially managed property that produces profit or income.
Mortgage REITs
These REITs act as lenders who loan money to owners of real estate for mortgages or purchase existing mortgages and collect interest from those loans. They mostly deal in investment of property mortgages.
Hybrid REITs
It is the final version of both, Equity REIT and Mortgage REIT which invests in both properties as well as mortgages. These REITs combine the mortgage investment of one with the property management of other. Like other corporations, REITs can be held publicly or privately. They offer several advantages over actually owning property. Unlike traditional real estate, they are highly liquid. They enable sharing in non-residential properties like malls, hotels and other industrial properties. REITs offer you regular dividends while the trust uses your money to buy real estate.
However, like other investments, REITs also carry some risk of loss of investment. There can be a complicated investment product. So, it is necessary to consult your financial professional before investing to check if the REITs are right for your portfolio.
