A real estate investment trust (REIT) is a type of company that owns or finances valuable real estate assets to earn a profit. According to the Securities and Exchange Commission (SEC), companies must meet several legal requirements to be classified as an REIT, including:
- Investing at least 75 percent of company assets in real estate
- Earning at least 75 percent of gross income from real estate sales, rent from real estate property, or interest from mortgages that finance real estate property
- Paying out at least 90 percent of taxable company income to shareholders in the form of annual dividends
- Organizing as a taxable corporation managed by a board of directors or trustees
- Having at least 100 shareholders, with no more than 50 percent of company shares owned by five or fewer individuals
REITs are attractive to smaller investors because they offer investment opportunities usually available only to entities with deep pockets, like banks and hedge funds. Everyday people can invest in REITs, many of which are listed on major stock exchanges. You could reap the benefits of the high-value real estate market.
What Types of Assets Do REITs Own?
As the name suggests, REITs invest in all types of real estate properties. In the United States, public REITs manage more than 500,000 properties worth approximately $2.5 trillion, and REITs of all different types own more than $3.5 trillion in gross assets.
Assets of listed REITs fall into several distinct property sectors, including:
- Data centers
- Healthcare real estate
- Industrial real estate
- Lodging and resorts
- Retail real estate
- Residential real estate
- Self-storage real estate
- Specialty real estate
The majority of REITs focus on just one sector, but some offer diversified portfolios with investments in multiple sectors.
How Do REITs Make Money?
REITs rely on the real estate assets they own to make money. An REIT typically leases spaces in its properties, such as apartments or office suites, and generates revenue from the tenants’ rent payments.
Income from real estate investments then passes to shareholders as dividends. A dividend is a portion of a company’s earnings that gets paid to those who own the company’s stock.
REITs must pay at least 90 percent of their taxable income to shareholders as dividends by law, but most actually pay closer to 100 percent. This makes stockholders happy and also helps pay the taxes owed on their dividends, so everyone wins.
mREITs, or mortgage REITs, function like most other REITs, but their profits come from their investments in real estate financing. These companies earn income from the interest paid on mortgages originated or sold by mREITs.
What Are the Types of REITs?
In addition to the various sectors of REITs own, there are four distinct categories of REITs:
- Equity REITs – Equity REITs represent the majority of all REITs. They own real estate in a variety of sectors and lease their properties to tenants to earn income through rent payments.
- Public non-listed REITs – Public, non-listed REITs (PNLRs) are registered with the Securities and Exchange Commission (SEC) but not traded on public stock exchanges. These REITs are similar to equity REITs but face certain restrictions that limit the amount of money they can pay to shareholders.
- Private REITs – Private REITs do not register with the SEC, nor do national stock exchanges list them. Shares of private REITs are typically sold to institutional investors with high net worth.
- mREITs – Mortgage REITs, or mREITs, finance income-producing real estate by purchasing mortgages or securities and profiting from the interest.
How Winton Strauss Can Help
When it comes to investing in an REIT, understanding the economic and tax-related implications is crucial. That’s where the knowledgeable real estate attorneys of Winton Strauss Law Group, P.C., come in.
Our firm is dedicated to applying our considerable experience and resources to help you achieve your financial goals. To find out more about how we can help you, contact us today for an initial consultation.