Investing in a real estate investment trust (REIT) offers a method of earning high dividends and diversifying your portfolio, according to Forbes. Real estate investor Patrick Carroll has been involved in various real estate ventures, including REITs, which provide an entry point for investors.
REIT Defined
Investopedia defines a REIT as a company that owns and operates or finances income-producing real estate. The company may create a trust that includes many property sectors or only one, such as multifamily housing or office complexes. These investments allow you to earn income from real estate without having to buy, manage, or finance properties themselves.
A Quick History of REITs
In 1960, U.S. Congress legally created REITs to make investing in real estate accessible to the average investor. This type of trust makes real estate investing similar to buying stocks. Many investors pool their capital with a fund manager, who purchases the properties and manages their renovations and repairs.
Types of REITs
Typically, a REIT buys properties throughout a country and then adds value to them through targeted renovations that make them more appealing to current residents and attract new tenants. The REIT leases the properties to tenants and collects the rent. The trust pays dividends to its shareholders, distributing the monthly income to shareholders.
A variation on the traditional REIT, the mortgage REIT, finances real estate, instead of owning it. This emerging type of REIT accounts for about 4% of this type of trust in the U.S.
Creating a REIT
The Internal Revenue Service (IRS) sets the requirements for a REIT. Only a taxable corporation managed by trustees or a board of directors can create this type of trust. The company must invest at least 75% of its total assets in real estate and earn at least 75% of its gross income from the properties through three methods. The REIT can earn income from:
- charging rent
- earning interest on financed mortgages
- real estate sales.
This company must amass a minimum of 100 shareholders who own relatively evenly dispersed stock amounts. A REIT can’t have whales because the IRS states that no more than 50% of the shares of a REIT can be owned by five or fewer investors. Because these trusts exist to create dividends for the stockholders, a REIT must pay a minimum of 90% of its taxable income to shareholders.
How the Rules Help Investors
Congress wanted to open up real estate investment to the average citizen. Most real estate investments require a significant source of income to start investing, such as requiring a person to qualify as an accredited investor. Recognizing that this stipulation limited real estate investing to millionaires, Congress created REITs.
Many REITs offer their investments through stockbrokers and financial advisors. Doing so lets anyone buy into them and invest in real estate. Like buying stock, a person can purchase a few shares or many, but not so many as to own a controlling interest. By empowering the IRS to set rules for creating these funds, Congress opened the world of real estate investing to everyone.
