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REIT definition

Real Estate Investment Trust definition

A real estate investment trust (REIT) is a company that owns, operates or finances income-producing real estate assets. 

According to the US Securities and Exchange Commission’s (SEC) REIT definition: “Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate.”

In this article, you will learn what REIT means for investors and traders.

What is real estate investment trust?

A real estate investment trust (REIT) owns and manages real estate assets, which may include office buildings, shopping malls, apartments, hotels, resorts, storage facilities, warehouses and even mortgages or real estate-linked loans.

REITs are modelled on mutual funds, which pool capital from investors. In return, investors earn dividends on their investments. 

REITs differ from other real estate companies as they do not develop and sell properties. REITs acquire and manage real estate assets to operate as a part of their portfolios.

Retail investors investing in REITs can gain exposure to large-scale, income-generating properties without having to buy commercial real estate. 

How to invest in REITs? Investors can buy publicly-listed real estate investment trust stocks from their broker or trade REITs through contracts for difference (CFDs), speculating on their price movement. 

How does real estate investment trust work?

REITs pool money from numerous investors to own, operate or buy income-generating properties or related real-estate assets.

There are many requirements a company must fulfil to qualify as a REIT. According to the SEC, a company must have the bulk of its assets and income connected to real estate investments. 

REITs must distribute at least 90% of their taxable income to shareholders annually in the form of dividends.

A company must have a minimum of 100 shareholders after its first year as a REIT. No more than 50% of a REIT’s share can be held by five or fewer individuals during the last half of a taxable year.

Companies that qualify as REITs are allowed to deduct dividends distributed to shareholders from taxable income.

“Because of this special tax treatment, most REITs pay out at least 100 percent of their taxable income to their shareholders and, therefore, owe no corporate tax,” said the SEC.

Other requirements to qualify as a REIT, as stated by the US SEC are:

  • REIT must be an entity that would be taxable as a corporation but for its REIT status.

  • REIT must be managed by a board of directors and trustees.

  • REIT must have fully transferable shares.

  • REIT must invest at least 75% of total assets in real estate assets and cash.

  • REIT must derive at least 75% of its total income from real estate related sources.

  • REIT must derive at least 95% of its total income from real estate sources and dividends or interest from any source.

  • REIT must have no more than 25% of its assets consisting of non-qualifying securities in taxable REIT subsidiaries. 

Types of REITs

There are primarily three types of REITs:

Types of real estate investment trust (REIT)

REITs can be also categorised as publicly traded REITs and non-traded REITs.

Publicly traded REITs are registered with the SEC and their shares trade on stock exchanges. The minimum investment amount is the price of one share. 

Non-traded REITs do not trade publicly. The minimum investment amount is typically $1,000 to $2,000, according to the SEC. Furthermore, there is less transparency into the share value of a non-traded REIT compared to a publicly traded REIT.

Some examples of REITs are NYSE-listed Annaly Capital Management Inc (NLY), communications infrastructure-focused American Tower Corporation (AMT) and Europe-based mall operator Klépierre S.A (LI). 

REIT trading

When investing in REITs, investors must be aware of the various factors that affect their valuation. 

Declining property values can adversely affect REIT profits, resulting in capital depreciation and decreased dividends. Investors must be mindful of the state of the economy and interest rates

Other important factors to keep in mind before investing in REITs are taxes on dividends, the effects of natural disasters to properties and return of capital on investment (ROI).

Traders and investors should perform their own REIT analysis before making any investment decision. 

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