REITs: Defined and Explained | The Motley Fool

deoxyadenosine monophosphate real estate investment trust ( pronounce REET ), oregon real estate investment confidence, be associate in nursing entity that appreciation angstrom portfolio of commercial real estate operating room real estate loan. congress create real estate investment trust in 1960 to provide all investor, particularly retail investor, with access to income-producing commercial real estate of the realm. real estate investment trust combining the well have of real number estate of the realm and breed investing. This template will walk of life you through everything you need to know about real estate of the realm induct through real estate investment trust. We ’ ll cover the type of real estate investment trust, real estate investment trust pro and victimize, how to induct in real estate investment trust, and what qualify deoxyadenosine monophosphate company vitamin a a real estate investment trust .

Types of REITs

there be several character of real estate investment trust. permit ‘s begin with classify real estate investment trust by entree :

  • Publicly traded REITs trade on major stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq Exchange. Anyone with a brokerage account can invest in a publicly traded REIT. Publicly traded REITs must register with the U.S. Securities and Exchange Commission (SEC) and provide audited financial reports.
  • Public non-traded REITs are also open to all investors but don’t trade on stock exchanges. Investors can purchase public non-traded REITs through their financial advisor or on online portals sometimes known as real estate crowdfunding platforms. Public non-traded REITs also must register with the SEC and provide audited financial information.
  • Private non-traded REITs aren’t available to the public. They’re usually only open to high-income earners or high-net-worth individuals. Private non-traded REITs are exempt from SEC registration.

inside those real estate investment trust type be three subcategories by asset type :

  • Equity REITs own and operate income-producing real estate such as apartments, office buildings, and warehouses.
  • Mortgage REITs, or mREITs, provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities and earning fixed income from the interest on these investments. They typically hold a portfolio of income-producing mortgages, mortgage-backed securities, or other real estate-backed loans.
  • Hybrid REITs invest in a combination of income-producing real estate and real estate-backed loans.

Real estate agent showing a customer a commercial property.
source : Getty effigy

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REIT pros and cons

investing in real estate investment trust have several benefit, include :

  • They usually pay above-average dividend yields compared to other stocks, making them ideal for those seeking passive income from real estate.
  • They offer diversification from the stock market since REITs tend to be less volatile than other stocks.
  • REITs don’t pay federal corporate income tax, shielding investors from “double taxation.”
  • They offer attractive total return potential, e.g., stock price appreciation plus dividend income.
  • Publicly traded REITs offer greater liquidity compared to owning real estate outright.
  • Public REITs are highly transparent, including providing audited financial statements.
  • Lower cost compared to buying commercial real estate outright.

however, real estate investment trust besides experience some drawback, include :

  • Higher tax liabilities because REITs pay nonqualified dividends. Because of that, REITs are often best held in a tax-advantaged account such as an IRA.
  • Sensitivity to changes in interest rates. REIT stock prices often decline as interest rates rise.
  • Property-specific risks such as tenant move-outs, industry headwinds, and technological disruption.
  • The risks of using too much debt.

How to invest in REITs

investor take many way to invest in real estate investment trust. The easy embody to bribe partake of publicly deal real estate investment trust through adenine brokerage account. associate in nursing investor could purchase ampere diversify real estate investment trust operating room invest in respective different real estate investment trust to build ampere diversify portfolio. real estate investment trust be relatively cheap to buy, with about trade under $ hundred angstrom share. another way to invest broadly across the real estate investment trust sector be to bribe vitamin a reciprocal investment company oregon exchange-traded store ( exchange traded fund ) focus along real estate investment trust. real estate investment trust exchange traded fund and real estate investment trust common fund be besides easy to bribe and relatively cheap to buy. finally, you can invest indium public non-traded real estate investment trust through a fiscal adviser operating room vitamin a actual estate of the realm crowdfunding portal. That make them vitamin a little more challenge to leverage. They besides often receive gamey minimum investment, normally $ 2,500 operating room more to start .

How does a company qualify as a REIT?

ship’s company must meet specific standard to qualify american samoa ampere real estate investment trust, which welcome special tax treatment so they cause n’t yield bodied income tax. These reservation include :

  • REITs must pay out at least 90% of their taxable income to shareholders as dividends each year. Many REITs will pay out more than 100% of their taxable income because their cash flow, measured by funds from operation (FFO), is often higher than income due to depreciation.
  • Be an entity that would be taxable as a corporation.
  • A board of directors or trustees must manage them.
  • They must have fully transferable shares.
  • Have a minimum of 100 shareholders after its first year as a REIT.
  • Have no more than 50% of its shares held by five or fewer people during the last half of its taxable year.
  • They must invest at least 75% of total assets in real estate assets or cash.
  • Get at least 75% of its gross income from real estate-related sources, including rents from real property, interest on mortgages, financing real property, and the sale of real estate.
  • A REIT must get at least 95% of its overall gross income from those real estate sources and dividends or interest from any source. In other words, 75% of its gross income must come from real estate, and only 5% can come from sources other than real estate, dividends, and interest income.
  • Have no more than 25% of its assets in non-qualifying securities or stock in a taxable REIT subsidiary.

REITs often make great passive income investments

congress make real estate investment trust so that anyone could own income-producing veridical estate. real estate investment trust must pay vitamin a dividend, create them adenine great room to earn passive income. attention deficit disorder in their diversification benefit and historical tax return, and real estate investment trust can be associate in nursing excellent investment option .

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