Moneyzine
/Investment Guides /Real Estate Investment Trust (REIT)

Real Estate Investment Trust (REIT)

Moneyzine Editor
Author: 
Moneyzine Editor
6 mins
November 6th, 2024
Advertiser Disclosure

A real estate investment trust, or REIT, is a company or entity that invests in different forms of real estate. These investments can include shopping malls, commercial office buildings, as well as hotels. These trusts can also invest in real estate related assets such as mortgages.

According to the Securities and Exchange Commission, there are three types of REITs:

  • Equity REIT: includes the most common type of real estate investment trust, whereby the owners or managers of the trust invest in, or take possession of, real estate assets and make money by charging rents.

  • Mortgage REIT: entities that lend money to real estate developers, or invest in financial instruments such as those issued by Fannie Mae, which are secured by mortgages.

  • Hybrid REITs: as the name implies, this entity invests in the same manner as both equity and mortgage REITs.

REIT Structure

For a company to qualify as a real estate investment trust according to the standards established by the SEC, the company must pay 90% of its taxable income to its shareholders each year. The company must also invest at least 75% of its total monies in real estate, and at least 75% of its gross income must come from investments in property or mortgages.

Investors can participate in REITs through stock exchanges, and those companies that are publicly traded must file reports with the SEC.

Benefits

Historically, the wealth of an individual was measured in terms of the amount of land a person owned. Today, wealthy individuals can take partial ownership in companies by investing in stocks and bonds. But the door has also been opened for the average investor to participate in the real estate market through REITs.

In fact, when Congress passed the Real Estate Investment Trust Act of 1960, it allowed companies to be exempt from corporate income tax if the criteria mentioned above were met. Congress hoped this financial incentive would result in an increase in the number of investors pooling their money together to form real estate trusts.

Management of Properties

While allowing the average investor to participate in the real estate market is the primary benefit of a REIT, there are other significant benefits from this arrangement such as professional management of the properties. If an individual was to purchase a property on their own, they would be responsible for managing the asset. With a REIT, the properties are managed by industry professionals.

Controlling Risk

Another benefit REITs offer is the ability to help control or limit risk. If an investor were to purchase real estate directly, they would have to take out a personal loan to help finance the purchase. The success or failure of just one project exposes the investor to a great deal of personal risk.

By investing in a REIT, the individual is purchasing a share of the trust. The risk of failure or success is no longer limited to just one property. The trust would own a diverse portfolio of real estate properties, and the investor automatically benefits from this diversification.

Real Estate Bubbles and REITs

No discussion of real estate trusts would be complete without addressing concerns over real estate bubbles. In many areas of the country, there are often sharp increases in the cost of buying a home. Individual investors also own homes, so they are acutely aware of the rise in housing prices, and the talk of a real estate bubble that may burst at any moment. For this very reason, these same individuals shy away from REITs.

Fortunately, a rise in residential real estate values does not affect all trusts equally. Commercial and residential real estate are very different markets. Just because the values of homes are on the rise has nothing to do with the popularity of businesses such as Public Storage or other entities that invest in commercial properties.

So while the real estate bubble may be of some concern to REITs heavily invested in residential real estate developers, it has very little to do with the performance of trusts investing in commercial real estate.

Real Estate and Retirement

The New York Times once reported that 401(k) plan sponsors were looking to offer participants alternatives to stocks and bonds. Today, many of these plans offer participants real estate mutual funds, which often hold REITs. If a plan administrator does their research, there's no reason they cannot find suitable funds to offer participants.

A well-run REIT is no different than any other well-run business in any other industry. If the company puts together a portfolio of products or services that makes sense to investors and treats its shareholders fairly, then it is likely to prosper regardless of whether or not it is a real estate investment trust or General Electric.

International Real Estate

The popularity in the United States has led to the spread, or promise, of REITs appearing internationally. The three most promising markets include Japan, the United Kingdom, and Germany.

Japanese REITs

Japan is perhaps the most interesting of the Asian nations to pass REIT legislation back in December 2001. Japanese REITs, also referred to as J-REIT are traded on the Tokyo Stock Exchange. Organizers and participants include foreign investment banks, and conglomerates operating out of Japan.

Since experiencing a drop in property prices in the 1990s, Japan finally appears to be seeing prices starting to increase. If this becomes a trend, the interest in J-REITs will rise sharply.

United Kingdom REITs

More recently, the rules for United Kingdom REITs were established and this legislation was enacted as part of the Finance Act of 2006, which went into effect in January 2007.

As is the case in the U.S, these newly formed U.K. REITS will have to distribute a large share (95%) of its income back to shareholders. Trusts in the U.K. must also be a closed end trust; the fund must be physically based in the U.K. and listed on a recognized stock exchange.

Supporters of these real estate investment trusts in the U.K. have even created an organization known as The REITs and Quoted Property Group. Organizers include leading commercial real estate companies, the British Property Federation, as well as the London Stock Exchange.

German REITs

The rationale for allowing REITs in Germany stem from a fear of investment loss to competing countries. The hope is that a G-REIT will keep investors interested in the German real estate market.

The laws concerning G-REITs were enacted in June 2007, and made retroactive to January 2007. The qualifications under this program include:

  • Real estate investments must be at least 75% of assets

  • Real estate investments must account for at least 75% of gross revenues

  • A minimum of 90% of all taxable income must be distributed to shareholders through dividends

  • While the corporation is tax exempt, shareholders must pay income taxes on dividends

  • Finally, each REIT must be established as REIT-AG corporation


About the Author - Real Estate Investment Trust (REIT)


Explore Investing Further

  • Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
  • Looking for a way to avoid swap fees while trading forex?
  • By providing instant diversification for your portfolio, investing in ETFs can amplify the potential of any investor, novice or seasoned alike. We scoped the market to curate a list of the best ETF trading platforms available for US investors.
  • Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
  • Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
  • The table below lists the best stock picks under $2, listed on public exchanges.
  • The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
  • This section will highlight the best EV-trading penny stocks available in the United States.
  • The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
  • Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
  • Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.

Related Content

  • What Can Help You Meet Your Budget While Shopping for Important Items?
    Budgeting while ensuring you don't compromise on quality can seem daunting. Whether filling your pantry, updating your wardrobe, or keeping up with the latest tech, smart shopping strategies are crucial for keeping your finances in check.
    April 2nd, 2024
  • How to Make a Million Dollars in 10 Years
    Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
    November 18th, 2024
  • How to Apply Maslow’s Hierarchy to Your Money This Year
    You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
    November 18th, 2024
  • How to Tackle Multiple Savings Goals
    When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
    March 22nd, 2024
  • The Countdown to Early Retirement: 10 Expenses to Eliminate
    Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
    March 22nd, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.