Invest in REITS Today
A REIT (Real Estate Investment Trust) is an entity formed wholly for business purposes. A REIT is a firm that owns, operates, and manages real estate properties. It allows investors to purchase shares in a large business building. Since it is a trust, therefore, under this, the investors own shares in the trust but not in the real estate properties. The benefit of investing in REITs is that even the person with less amount can invest in real estate and purchase the equivalent shares. REITs are considered as ‘mutual funds’ of real estate investments as they provide a regular flow of income. Unlike TIC arrangements, there is no limitation on the number of investors. Under REITs, the investors buy the shares with the help of real estate agents.
Requirement to form a REIT:
- In order to qualify as a REIT, a company must be taxable as a corporation.
- A company must put 75% of its assets in cash, real estate, or treasuries.
- 75% of a company’s overall gain must come from rents or through selling real estate properties.
- A company must distribute 90% of its income as dividends among its shareholders.
- A company must be regulated by the Trustees or Board of Directors.
- Not more than 50% of a organization’s shares should be held by its five or less shareholders.
Types of REITs
The REITs are of two types:
- Equity REITs – An Equity REIT owns and invests in real estate properties. The majority of REITs are Equity REITs. The revenue under Equity REITs is generated through rents. Equity REITs are responsible for renovating, managing, purchasing, and selling real estate properties.
- Mortgage REITs – Mortgage REITs are completely different from Equity REITs. The Mortgage REITs lend money to real estate investors or developers, unlike Equity REITs. Rather than investing in real estate properties, Mortgage REITs lend money on mortgages. The primary source of income under Mortgage REITs is the interest earned on mortgage loans.
The below-discussed example explains the difference between Mortgage and Equity REITs. Let say a company named ‘Advent’ has qualified as a REIT 1031 Exchange. Now, it buys an office building with the assets produced from its investors and then leases it out. Since the company Advent owns and deals with this real estate property, it is an Equity REIT. On the other hand, assume a company named ‘Gamma’ qualifies as a REIT. Rather than investing in real estate properties, it decides to lend money to real estate investors. For this situation, the company Gamma will make profits in the form of interest it earn on loan. Hence it’s a Mortgage REIT. Add paragraph text here.
