Entities that invest in different types of real estate or real estate related assets such as commercial complexes, shopping centers, offices, and hotels are known as real estate investment trusts or REITs. These entities first came into being in the 1960’s to give people a chance for investing in large-scale commercial properties.
The internal revenue code has a list of conditions, which a company must fulfill in order to qualify as an REIT. Below is the list of these conditions.
1.It must be structured as a corporation or a business trust.
2.It must be under the control of a board of directors and officers.
3.It must have a minimum of 100 shareholders.
4.Shares should be fully transferable without any problems.
5.The company must invest 75 percent of its total assets in real estate.
6.It should generate 75 percent or more of its gross income from investments in real estate or mortgages in real estate.
7.Another condition is that it should pay 90 percent or more of its taxable income to its shareholders in the form of dividends.
REITs may be held publicly or privately. If they are publicly held they must be listed with the SEC.
Types
There are three kinds of REITs: equity, mortgage and hybrid REITs. Below are descriptions of each type.
Equity REITs: This is the most common kind of REIT. This kind of entity owns or invests in real estate and makes money from the rent it collects.
Mortgage REITs: This type of REIT typically lends money to owners or developers and invests in financial instruments that are secured through mortgages. Their main revenue is interest earned from mortgage loans.
Hybrid REITs: These are a combination of the other two types of REITs.
Advantages of REITs
1.Investing in these trusts has the advantage of buying a physical asset and the prospect of increased returns due to appreciation in the rent. The market value of the properties is another benefit.
2.The income generated by the property is shared among the shareholders and reassures them of their rights to the property.
3.Even a person with an average income can own real estate without large down payments or any hassles.
4.Only one level of taxation is applicable to income earned from REITs as the entity can avoid corporate taxes.
People invest in REITs by purchasing shares or by investing in mutual funds specializing in real estate. People investing in these trust have a much more liquid investment. Most of these trusts possess a 7 percent to 10 percent dividend yield, making it profitable.
Investing in REITs is a way to buy stock from a reputable and established entity. Only invest in these trusts after carefully analyzing all aspects and understanding all risk factors involved.
Additional Help
Various firms offer help to new entrepreneurs by offering their services and products to help run the businesses efficiently. This help includes software designed with small and large businesses in mind.
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site smallbusinessconsultingdotcom