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What Is Real Estate Investment Trust (REIT) And Why To Invest In It?

REIT or real estate investment trust is a company that owns, manages, or finances properties that generate income. It facilitates individuals from all spheres of life and not just high net worths to invest in income-producing real estate or related assets.

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Like a mutual fund, REIT pools the investors’ funds and provides the opportunity for individual investors to earn full returns and dividend-based income, thus helping the communities thrive and grow without buying or managing any property.

Who can invest in REITs?

One can invest in the portfolios of real estate investment trust assets in the same way they would invest in other sectors. You choose to purchase company shares or buy exchange-traded funds (ETF) or invest in mutual funds. The shareholders of REITs earn a percentage of the income generated without owning, buying, or managing any financial properties.

A study shows that nearly 145 million Americans live in households that generate income from real estate investment trusts through IRAs, 401(k), pension plans, and other investment options.

What type of assets do REITs own and manage?

All REITs cumulatively own more than $3.5 trillion in assets across the U.S. Of the total REIT assets, public REITS own assets worth approximately $2.5 trillion, representing more than 500,000 properties.

The equity market capitalization of the U.S. listed REITs is more than $1.35 trillion.

REITs own and manage various types of real estate properties. This includes apartment buildings, retail centers, warehouses, offices, cell towers, medical facilities, data centers, hotels, and infrastructure. Ideally, a REIT focuses on a specific property type; however, diversified REITs manage multiple property types in their portfolio.

Many REITs are publicly traded on major security exchanges, and REIT investors can buy and sell them just as they make transactions in stocks. REIT trading is usually of a sizable volume and, as an instrument, is considered to be very liquid.

Which business models qualify as REITs?

Most REIT business models are very simple – Leasing real estate space and collecting rent on the leased space. The income generated through leasing is then distributed to the shareholders in the form of dividends. REITs need to pay 90% of the taxable income generated back to the shareholders. Income tax on the dividends is in turn paid by the shareholders.

To become a real estate investment trust, certain provisions in the IRC (Internal Revenue Code) need to be complied with. They must specifically meet the below-mentioned requirement to qualify as a REIT.

  • At least 75% of the total assets should be invested in real assets, U.S. Treasuries, or cash
  • A minimum of 75% of the total income should be derived from interest on mortgages that finance real properties, rents, or real estate sales
  • Each year a minimum of 90% of the taxable income generated should be paid back to shareholders as dividends
  • A board of directors or trustees manages the company
  • It is a corporate entity that is taxable
  • The number of shareholders should be more than 100 after a year of existence
  • Maximum 50% of the shareholding is by five or fewer shareholders

Why should you invest in REITs?

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Historically, REITs Investments have given a substantial return on investment, based on steady and high dividend income and long-term capital appreciation. They have a very low association with other assets, making them a low-risk portfolio and an excellent portfolio diversifier. Thus increasing the returns on investment.

Listed REITs are professionally managed companies that trade publicly with the sole goal of maximizing shareholder profits. REITs investing has given attractive returns to its shareholders in the past 45 years compared to the stock market, bonds, and other assets.

Since the REIT performance tracking began in 1972, the total return performance of the REITs in the last 20 years has been exemplary. It has outstripped the performance of the S&P 500 index and other major indices, including the rate of inflation.

How can you invest in REITs?

As an individual, if you are looking to invest in REITs, you can buy shares in REIT, which is listed on the stock exchange just like any other public share. Alternatively, you can purchase such mutual funds that invest in REITs or go for exchange-traded funds (ETF).

Investors also have the option of investing in private REITs and public non-listed REITs. For analyzing the best financial objectives and proper REIT investment recommendation, you can refer to a financial advisor, a broker, or an investment advisor.