What Is A Real Estate Investment Trust And How Does REITs Work
A real estate investment trust (REIT) is a special type of company that invests solely in real estate properties and mortgages. REITs own, operate, and finance real estate properties from which they generate rental income.
The fact that most REITs trade in stock exchanges makes it possible for investors to buy their shares. By investing in REITs, you gain exposure to some of the biggest income generating properties without having to bear the burden of being a landlord.
REIT investors earn a share of the income generated by the investments that the REITs make in the real estate industry. In addition to the REIT income, shareholders also benefit from the appreciation of the REIT share price in the market.
- Structured as a corporation or business trust
- Derive 75% of total gross income from rent and mortgage interest
- Managed by a board of directors or Trustees
- Pay Dividends of at least 90% of its total taxable income
- Offer transferable shares and backed by at least 100 shareholders
- Have no more than 50% of its shares held by less than five investors
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What Assets Do REITs invest in?
Real estate investment trust invests in a wide array of real estate properties. For starters, the biggest REITs are known to own huge portfolios of office spaces in some of the biggest cities, as well as apartment buildings and warehouses. Some REITs also invest in Medical facilities, data centers as well as cell towers and hotels.
How Do REITs Make Money?
REITs make money by simply leasing space in the buildings they own and manage. Upon leasing the space, the property corporations get to generate rental income as agreed with the tenants. The rental income generated is, in part, paid to shareholders in the form of dividends.
In the U.S, REITs are required by law to payout at least 90% of their taxable income to shareholders. The remaining 10% mostly goes to cover operation costs. Shareholders must pay income tax upon receiving dividends from REITs.
Mortgage REITs are slightly different from other real estate investment trusts as they don’t own real estate directly. Instead, these types of REITs finance real estate properties and get to earn an income from interest on these investments.
Why Invest In REITs?
Real Estate Investment Trust are ideal securities for portfolio diversification. These kinds of investments are especially suitable for income-focused investors, given the steady dividend income always on offer in addition to long term capital appreciation.
The fact that REITs have a low correlation with other assets and securities in the capital markets makes them ideal portfolio diversifier for reducing the overall risk in the markets.