Real Estate Investment Trusts (REITs) – The Basics You Must Know

Real Estate Investment Trusts (REITs)

What is a REIT?

A Real Estate Investment Trust (REIT) is a company that owns or finances income-producing properties. REITs are like mutual funds. These companies allow investors to pool their money into a collection of properties or other real estate assets. This opportunity allows investors to access dividend-based income, and help the properties thrive.

A REIT does not develop real estate properties and resell them. Instead, a REIT buys and develops properties with the intent to operate them as part of its own investment portfolio.

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What Are The Qualifications for a REIT?

To qualify as a REIT, the following conditions are as follows:

1. There must be at least 100 shareholders.

2. No five shareholders can own more than 50% of the shares.

3. At least 75% of assets must be invested in real estate, cash, or treasuries.

4. 75% of gross income must derive from real estate.

How Does a REIT Work?

REITs allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock. The stockholders of a REIT earn a share of the
income produced through real estate investment, without actually having to buy or finance a property. Most REITs trade on major stock exchanges but there are also public non-listed, equity, mortgage and private REITs.

Majority of trusts operate by leasing space and collecting rent on the properties. As the company generates income, it returns to shareholders in the form of dividends. REITs must pay out 90 percent of taxable income to its shareholders, most pay out 100 percent.

Real Estate Investment Trusts (REITs) Explained

What Are The Different Types of REITs?

The four categories of REITs are; Equity, Mortgage, Public Non-listed, and Private.

1. Equity REITs

Equity REITs own and manage properties, and generate long-term income on the rent from the properties they own. Equity REITs engage almost all aspects of the economy. This includes apartments, hospitals, hotels, industrial facilities, infrastructure, nursing homes, office buildings, shopping malls, storage centers, and more.

2. Mortgage REITs

Mortgage REITs invest in mortgages or mortgage securities tied to commercial or residential properties. These REITs invest in agency mortgages guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae, non-agency mortgages, or commercial mortgages.

3. Public Non-Listed REITs (PNLRs)

PNLRs register with the Securities and Exchange Commission (SEC), but do not trade on national stock exchanges. PNLRs are subject to the same IRS rules and make quarterly and yearly reports to the SEC. Unlike other REITs, they face redemption restrictions that limit their liquidity.

4. Private REITs

Private REITs are not traded on national stock exchanges and not registered with the SEC. The private trusts sell only to institutional investors, usually.

Benefits of a Real Estate Investment Trust?

REITs offer investors many benefits including:

1. Diversification – investors have an efficient way to diversify their investments to reduce risk and increase long-term returns.

2. Dividends – real estate investment trusts provide a stable income to investors.

3. Liquidity – real estate investment trusts are easily bought and sold.

4. Transparency – REITs operate under the same rules as other public companies for securities regulatory and financial reporting purposes.

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