A trust or fund called real estate investment trust (REIT) owns and oversees commercial real estate that produces revenue (hospitals, shopping complexes, industries properties, plantations, office blocks and hotels).
A REIT is permitted to deduct shareholder distributions from its business taxable income. However, in order for the REIT to benefit from this tax-free status, the bigger part of its income and assets must be related to property investments, and it must annually distribute at least 90 percent of its full income to unit holders and investors.
REITs, which work similarly to mutual funds, were created in 1960 to permit little investors to invest in large real estate assets.
What qualifies as a REIT?
To qualify as a REIT, a firm must meet the following criteria:
- Real estate must comprise at least 75 percent of its total assets:
- At least 75 percent of the company gross income must come from the rental portfolio.
- Must return at least 90 percent of income to shareholders in the type of dividends
- Must have at least hundred shareholders with no more than 50 percent of total shares held by 5 or fewer of those investors, and
- Be structured as a taxable entity that is overseen by a board of trustees or directors
For some real estate corporations seeking to get REIT status, the most significant barrier to overcome is the requirement to have at least hundred investors.
Benefits of REITs
Potential for higher yield
REITs generally pay higher dividends than normal equities. REITs are capable of producing higher yields due to their favorable tax structure. These trusts own cash-producing properties.
Accessibility
REITs are generally listed on national exchanges and give investors considerable liquidity. These trusts invest in a portfolio of commercial real estate assets that are usually not accessible to retail investors.
Diversification
REITs can give diversification advantages because they tend to follow the real estate cycle, which usually lasts a decade or more.
Managed by professionals
When you invest in REITs, your money will be fully managed by experts, permitting you to relax and reap the rewards.
Say good-bye to mortgage loans, problematic renters, house hunting, and the rest because REIT management teams oversee the tenants.
Affordability
Direct real estate investment is more costly than investing in REITs. You just need a reasonably little investment which is affordable in comparison to a few other substitute options or asset classes.
Want to invest
If you invest in REITs, your income is not guaranteed.
They are linked to the ups and downs of the real estate market, and because 90 percent of their profits must be distributed as dividends, they are occasionally prone to poor performance.
Despite that, REITs continue to be an extremely appealing asset class, and should be included in a diversified portfolio.
Finally, if you are interested in real estate investment to get high yield, and you are aware of the potential risks involved in such an endeavor, then REITs may be the best option for you as an investor. REITs have a proven record of delivering a stable income combined with long-term share price appreciation, effective diversification and inflation protection.
