How does real estate investment trusts work?
What are real estate investment trusts or REITs and how do they work. Is there some law that give these trust some tax efficiency status and how can investors invest in these REITs. With the real estate market in the US the way as it is, is it a good time to invest in the property market through real estate investment trusts. What kind of people manage these funds or trusts and what are their typical return on investments?
- Anonymous10 years agoFavorite Answer
A REIT buy's skyscrapers, shopping malls, apartment complexes, office buildings, or housing developments. Rather than investing directly in real estate, investors of REIT's invest in a professionally managed portfolio of real estate.
REIT's trade on the major exchanges, just like stocks. REIT's make their money from the rental income, profits from the sale of the property and other services provided to the tenants. REIT's also receive special tax considerations; they do not pay taxes as long as they pay out at least 90% of their net income to investors. Thus, successful REIT's can offer investors high yields, current income, and moderate growth. But, while these tax considerations benefit the REIT, the investor still has to pay tax on the growth just like a share of stock.
There are several types of REIT's:
There is a equity REIT. It's main objective is buying, renovating, managing, maintaining, and selling real estate. This is the most common type.
There is the mortgage REIT. It makes loans or invests in existing mortgages.
Hybrid REIT's do a combination of both.
Then there are UPREIT's and DownREIT. These were developed in the early 90's to provide tax benefits to their shareholders.
All REIT's are governed by strict regulation. REIT shares are more liquid than investing directly in real estate. The REIT's are professionally managed. Open up investment opportunities that may not be available to the average investor. Provide annual income. Disadvantages:
Supply and demand imbalance. Booms and busts can impact office space activity. Rising interest rates. This increases borrowing costs and impact bottom line. This could also slow down rentals and purchases if interest rates increase. Subject to risks associated with the general real estate market including possible declines in the value of real estate, decline in economic conditions, and possible lack of availability of mortgage funds. Use as a tax shelter is limited. REIT's are not allowed to pass losses through to their investors. So, if the REIT loses money, you won't be able to use the loss to offset other investment gains. Dividends paid from a REIT are taxable as income. A portion of a REIT dividend may be taxed an a lower capital gain rate. For tax years beginning on or after January 1, 2003 and before January 1, 2011, qualifying dividends paid to individual shareholders from domestic corporations (and qualified foreign corporations) are taxed at long-term capital gains tax rates. For tax years prior to January 1, 2003, however, stock dividends were taxed at ordinary income tax rates, generally resulting in significantly more tax due. Absent further legislative action, stock dividends will again be taxed as ordinary income beginning in 2011.
Capital gain tax liability may occur when you sell your shares. If you sell the share for more than you bought it for. Just like stock.
When looking to invest in a REIT, you can do the same research as you would have done in researching a share of stock. Because they are publicly traded companies you can look at their earnings, both past performance and potential for future growth, dividend yield, payout ratio, and price-earnings ratio. By keeping an eye on the real estate market you may be able to detect certain shifts in the market, overbuilding, current buildings where office space is sitting empty, or where certain types of business are closing because of economic situations. This way you can more to another type of REIT that may work better in a certain kind of market.
You can go the Forbes magazine REIT gold list to see different REIT companies, what they are invested in, and what the performance is. http://www.forbes.com/2008/02/20/reit-perfomance-g...
- Anonymous4 years ago
How does real estate investment trusts work?
What are real estate investment trusts or REITs and how do they work. Is there some law that give these trust some tax efficiency status and how can investors invest in these REITs. With the real estate market in the US the way as it is, is it a good time to invest in the property market through...Source(s): real estate investment trusts work: https://trimurl.im/d18/how-does-real-estate-invest...
- 5 years ago
Investing in property can provide high returns. It also runs the risk of a deep-pocketed loss. Essentially, all homeowners make an investment when they purchase a property since homes generally appreciate in value. However, some people find that investing in properties outside of home ownership can amass a small fortune over time. There are several ways to invest in properties, each of which offers a different risk level, maintenance requirement and possibility of returnSource(s): http://bitly.im/g/invest-in-property
- 10 years ago
The starting investors pool their money, purchase realestate (usually leveraged by loans), the income dirived from the property is divided amoung the shareholders after the expenses of the management company are paid. After a period of time, the trust lists its shares on a stock exchange and they are then traded just like stocks. Usually, the Starting Investors will get their shares at a discount (will get a higher rate of return), and thus they have built in an incentive to get in early and wait through the starting period when their shares are not liquid (can not be sold easily).
There are special tax laws on REITs. The income of the company is not taxed until it is distributed to the owners. If you list your shares to pay dividends as shares, you do not have to pay any tax until they are either sold or you begin to tap the dividend stream.
These funds are started by real estate companies in order to have a series of building they are contracted to searve (collect rents, maintain, evict dead beats, so on). They make money on the monthly fees charged per apartment, and they make money on the sale of shares to originating investors and when the stock goes public.
Most that are available in the open market are paying between 5% and 7.5% (as the income increases because of rent increases and increased value of the apartment, the price of the shares rise to maintain that 5% to 7.5% rate). many original investors earn about 7% at the start of the investment and by the time it is public, they are earning 9% to 11% on their original investment. The investment is illiquid for the first few years (3 to 5 years).
They are generally good, safe long term investments. The return is based on income rates based on rents. It is an easy way to own real estate. REITs based on Apartments are doing well now (all those people who lost a house due to forclosure have to live somewhere). Doctors' offices are also pretty safe. Doctors tend to go 20 to 30 years without moving their practice and they pay their rent very regularly and relyably. Office buildings are more sensitive to recession as are retail buildings. They also tend to have higher returns when they are fully rented.
I've been in several REITs, and have been satisfied with the return. One I was an Original Investor. I bought in just before they closed the Original investment phase. It went bust right after they formed (they were not able to raise enough money to buy enough buildings to get the economies of scale they needed to make this a going REIT. Because the real estate appreciated from the time it was bought to the time the REIT went down, I was able to make a 33% return in about 9 months. In addition, I had 9 months income at 6%. I was pretty happy.
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- 4 years ago
REIT's exchange on the real trades, much the same as stocks. REIT's profit from the rental wage, benefits from the offer of the property and different administrations gave to the inhabitants. REIT's additionally get unique duty contemplations; they don't pay charges the length of they pay out no less than 90% of their net pay to financial specialists. In this manner, effective REIT's can offer speculators exceptional returns, current salary, and moderate development. Be that as it may, while these duty contemplations advantage the REIT, the financial specialist still needs to pay charge on the development simply like an offer of stock.
There is a value REIT. It's fundamental target is purchasing, revamping, overseeing, keeping up, and offering land. This is the most widely recognized sort.
There is the home loan REIT. It makes credits or puts resources into existing home loans.
Half breed REIT's do a mix of both. At that point there are UPREIT's and DownREIT. These were produced in the mid 90's to give tax reductions to their shareholders.
- Anonymous5 years ago
Real Estate Investment Trust: A Primer
- REITs Still Serve Their Legislative Intent
- Whether the real estate market is in crisis or stable, REITs serve their legislative intent, i.e. they are a means or method for the small investor aka "Joe the plumber", to invest in commercial real estate.
September 14, 2010 marked the 50th anniversary of the U.S. REIT industry.
President Dwight D. Eisenhower signed legislation in 1960 creating REITs.
The legislation combined the best attributes of real estate and stock-based investment and placed investments in large-scale income-producing real estate properties within the reach of the small investor.
This made it possible for average investors to invest in REITs in the same way they invested in other industries, i.e. through the purchase of equity-type units. The investor's ownership of real estate is divided into various "units", the value of a unit being a portion of the value of the property/properties owned by the REIT.
REITs are investment vehicles, classified as:
equity (EREIT - where a company buys, owns and manages income-generating properties like apartments, shopping malls, buildings with offices, etc.);
mortgage (MREIT - which either loan money for mortgages to real estate owners or purchase existing mortgages or MBS (mortgage-backed-securities; also known as "mortgage pass-through."); or
hybrid (a portfolio of equity and mortgage REITs combined).
REITs are a means of allowing investors to directly participate in the higher returns generated by real estate properties because, in essence, they own a "piece" of property/properties in the trust.
REITs can be publicly or privately held; however, typically REIT units are publicly quoted and traded, similarly to mutual funds. NAREIT, the National Association of Real Estate Investment Trusts, categorizes REITs as: publicly traded, private, and non-exchange traded. Public REITs are registered with the SEC (Securities and Exchange Commission) and traded in major stock exchanges just like shares of common stock in other companies are listed and traded. By contrast, private REITs are not registered or traded with the Securities and Exchange Commission (SEC). Non-exchange traded REITs are registered with the SEC but not traded on any of the public exchanges.
Two main IRS requirements for REITs are: (1) a company must have most of its assets and income tied to real estate investment, and (2) that company must distribute at least 90 percent of its taxable income to its shareholders yearly. If a company qualifies as a REIT, it can deduct dividends paid to its unit-holders (or shareholders) from its corporate taxable income, and consequently, owe no corporate tax. Applicable taxes will be paid by the unit-holders. Furthermore, in line with IRS treatment, most states do not require REITS to pay state income tax.
REITs may have originated in the US, but the concept has spread around the world. There are Asian and European countries with REIT legislation. The Australian REIT market is the largest in Asia. (REITs are called LPTs there.) However, the US still boasts the largest REIT market.
Regardless of the host of issues adversely impacting the real estate market currently, REITs are still an easy convenient means for the average investor to invest in high-value income-producing property and other areas of real estate that would otherwise be totally inaccessible to them, because they simply do not have the funds to buy and sell properties in their own. REITs, as a sub-component of the financial industry, have become and will likely remain an integral segment of the economy.
REIT shares clearly can benefit most investors, whether value-driven or growth-oriented, individual or institutional. They offer the benefits of ongoing current income, with the potential for long-term capital appreciation that historically has met or exceeded inflation.
They are equities that derive a large part of their value from tangible, hard assets and the effective management of those assets.
They have been proven to bring the benefits of balance, diversification and greater risk/reward efficiency to a broad range of investment portfolios."
This article is just an introduction; a primer. NAREIT®, the National Association of Real Estate Investment Trusts®, the "voice for REITs" continues to supply significant news and reports affecting the real estate investment world, and more specifically REIT investors.