What are Real Estate Investment Trusts (REITs)? - Tax Professionals Member Article By Tiffany Gaskin
Posted by Tiffany Gaskin

What are Real Estate Investment Trusts (REITs)?

What are Real Estate Investment Trusts (REITs)?

Almost 150 million Americans live in homes under a Real Estate Investment Trust. They fund it through IRAs, pension funds, 401(k), and other investments. So, what is this popular trust about?

Real Estate Investment Trusts are corporations that own lots of real estate that produce income after a particular time. They are usually fashioned like mutual funds investments and give individuals a chance to invest in real estate and make a profit without owning a single piece of land or directly financing any property. 


Mode of Operation of REITs

REITs were started in 1960 as part of the Cigar Excise Tax Extension amendment. The amendment allows private investors to buy shares in large commercial real estate projects. This benefit was exclusive to the highly wealthy people. 

It operates just like other investment opportunities. Individuals can purchase shares, exchange-traded fund (ETF), or a mutual fund of the REIT and, in the end, have a share of the proceeds. 

Most REITs differ by specializing in an area of real estate. It now depends on the investor to choose which aspect they prefer. Some REITs offer investment opportunities in almost all real estate areas, especially retail and office equipment and properties. 

The REITs majorly trade on stock exchanges. Like every other share traded on the floor, their investors can buy their stocks and sell them during trading sessions. This fact makes them classified as liquid instruments.

 

Types of Real Estate Investment Trusts

There are approximately five types of REITs available for all investors. They include:

Healthcare REITs

This class is predominantly tied to medical outposts, hospitals, nursing homes, and retirement centers. Part of the investment is solely reliant on the patronage of the healthcare sector. Medicare, bed fees, and Medicaid also form part of REITs' investments to pay their investors. 

Mortgage REITs

Mortgage REITs take up to 10% of the entire investment. For most REIT corporations, their investments are tied to Fannie Mae and Freddie Mac, two of the most popular government-funded projects that offer to buy mortgages on a secondary level. 

Although they invest in mortgages, there are also significant risks attached. Mortgage REITs can reduce when the interest rates go up, which means the stock prices will decline. 

Retail REITs

This takes up 24% of the total REIT investment. It's mainly focused on free stands and shopping malls. Almost all shopping malls in America are likely to be REIT investments. The money from this class is charged. 

A significant risk could arise if traders or tenants complain of poor sales and declare bankruptcy. The most stable Retail REITs are usually in grocery and home improvement malls. 

Office REITs

As the name implies, it is an investment in office spaces and buildings. The income is generated from rents charged from the businesses occupying these buildings, usually long-term. Most REITs are most predominant in economically viable areas. 

Residential REITs

This REIT class focuses on family complexes and other sub-apartment buildings. As usual, the funds are gathered from the rents charged to tenants. An excellent option to look out for is REITs in Residential buildings are those areas that charge high rents. 

Pros and Cons of REITs

Getting involved in REIT could be a blessing or curse for many people. Some of the pros include

  • They offer a strong dividend with appreciation in the long term.

  • They are easy to buy and sell as they are traded on trading exchanges. 

Cons: 

  • There is not much capital appreciation as REITs pay almost 90% of the income generated to investors

  • It is highly susceptible to market manipulations. 


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Tiffany Gaskin
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