What is a REIT?
A Real Estate Investment Trust (REIT) is a corporation that invests in real estate through ownership of real property or securities. REITs receive special tax considerations. If a company elects to file taxes as a REIT, it is exempt from paying income tax on all qualifying income, which it pays out in dividends. However, in order to qualify for REIT status, the company must meet several criteria.
- Pay dividends of at least 90% of REIT’s taxable income
- Be jointly owned by 100 persons or more
- No more than 50% of the shares can be held by five or fewer individuals during the last half of each taxable year
- At least 75% of total investment assets must be in real estate
- Derive at least 75% of gross income from rents or mortgage interest
- Structured as a corporation, trust, or association
- Managed by a board of directors or trustees
Types of REITs
Own and manage property.
Deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.
Invest in multiple real estate asset types.
Public vs Private REIT
- Trade on a public stock exchange (Provide instant lisquidity as they buy & sell share every day)
- Trading daily also means investors can push price up or down, reflecting current market sentiment and regardless of actual market value
- Increased costs to requirements of a publically listed stock
- History of more volatile pricing
- Not traded on a public stock exchange (Generally offering only 30 day liquidity)
- Value REIT is based on the value of underlying real estate (not a “traded” market price)
- No additional “public listing” related regulatory costs
- Stable, rational pricing = lower volatility