What are REITs — Real Estate Investment Trusts?When a company owns, operates, or finances income-generating real estate then it is called a real estate investment trust REIT.REITs pool the capital of many investors, making it possible for individual investors to earn dividends from real estate investments, without needing to buy, manage, or finance any properties themselves.How REITs WorkIn 1960 REITs was established by Congress as an amendment to the Cigar Excise Tax Extension.Investors were allowed to buy shares in commercial real estate portfolios by the provision, which was earlier available only to wealthy individuals and through large financial intermediaries.Even if REITs specializes in specific real estate sector, the diversified and specialty REITs hold different types of properties in their portfolios, so it comprises both office and retail properties.Apartment complexes, data centers, healthcare facilities, hotels, infrastructure are the properties included in a REIT portfolio, also fiber cables, cell towers, energy pipelines, office buildings, retail centers, self-storage, timberland, and warehouses can all be a form of properties.Major securities exchanges have public trading of many REITs, and they can be bought and sold like stocks throughout the trading session by investors.These REITs typically trade under big volume and are considered very liquid instruments.What Qualifies as a REIT?The business model of most REITs is quite straightforward.
Space is leased and rents are collected on the properties, then that income is distributed as dividends to shareholders by REIT.Mortgage REITs instead of owning real estate, finance real estate.
Income is earned from the interest on their investments by these REITs.A company must comply with certain provisions in the Internal Revenue Code (IRC) to qualify as a REIT.These requirements being to primarily own income-generating real estate for the long term and distribute income to shareholders.If a company wants to qualify as a REIT then it must meet the following requirements:At least 75% of total assets to be invested in real estate, cash, or U.S. Treasuries.At least 75% of gross income to be obtained from rents, interest on mortgages that finance real property, or real estate sales.Each year a minimum of 90% of taxable income to be paid in the form of shareholder dividends.The company should be an entity that’s taxable as a corporationA board of directors or trustees to manage the companyAfter its first year of existence the company must have at least 100 shareholdersFive or fewer individuals cannot hold more than 50% of its sharesAs in the current scenario, REITs collectively own about $3 trillion in gross assets, publicly traded equity REITs account for $2 trillion.Different types of REITs Equity REITs — That owns and manages income-producing real estate.
Income are generated mainly through rents and not by reselling properties.Mortgage REITs — The real estate owners and operators are lent money by these REITs either directly through mortgages and loans, or indirectly through the acquisition of mortgage-backed securities.
The spread between the interest they earn on mortgage loans and the cost of funding these loans is how their earnings are generated.
Yet they are more stable as they do not face market fluctuations.Private REITs — These REITs neither are registered with the SEC nor do they trade on national securities exchanges.
