Real estate investment trusts (“REITs”) permit persons to invest in large-scale, income-producing real estate. Real estate investment trust (REIT) is an organization that owns, and usually operates, income-generating real estate. REITs are in charge of several types of commercial real estate, ranging from apartment buildings, office, warehouses, shopping centers, hotels, hospitals, and timberlands.
The US Congress established real estate investment trusts (REITs) in 1960 as an adjustment to the Cigar Excise Tax Extension of 1960. The amendment allows individual investors to purchase shares in commercial real estate portfolios that gets income from different properties. Properties included in a REIT portfolio may consist of data centers, apartment complexes, health care facilities, health care facilities, hotels, infrastructures such as cell towers, fiber cables, cell towers, office buildings, and energy pipelines
A REIT does not build real estate properties for the aim of reselling them. Instead, a REIT buys and develops properties mainly to operate them as part of its investment portfolio.
Several REITs are registered with the SEC and are openly traded on a stock exchange. They are also called publicly traded REITs. Some may be registered with the SEC but are not traded public. These are known as non- traded REITs; it is one of the most vital distinctions among the various kinds of REITs. Before investing in a REIT, it is proper to understand whether or not it is publicly traded, and how it could be beneficial and risks associated.
Most REITs focuses on a specific real estate sector, investing their time, energy, and resources on that particular aspect of the entire real estate horizon. However, specialty and diversified REITs often hold several properties in their portfolios.
Most REITs have a focused business model: The REIT leases space and receives rents on the properties, then shares that income as dividends to the organization shareholders.
To be eligible as a REIT, a company must conform to specific provisions made available in the Internal Revenue Code. These requirements include owning income-generating real estate for the long term and sharing income to shareholders. Notably, a company must fulfill particular needs, including:
Invest a minimum of 75% of its total assets in real estate, cash or U.S. Treasury
a. Gets a minimum of 75% of its gross income from the rental of real property, interest on mortgages financing the real property, or from sales of real estate.
b. Payback at least 90% percent of its taxable income in the form of shareholder dividends every year.
c. Possess at least 100 shareholders after its first year of existence
d. Must not have more than 50% of its shares held by five or fewer individuals during the last half of the taxable year.
Some other requirements, including the REIT, are an entity that is taxable as a corporation before the IRS. Furthermore, the enterprise must have the management of a board of directors or trustees.
There are various types of REITs. The funds have classifications that specify the type of business done and can be further classified depending on how they buy and sell shares.
Equity REITs is the most known form of enterprise — these entities purchase, own, and control income-producing real estate. Revenues are gotten basically through rents and not from the reselling of the portfolio properties.
Mortgage REITs referred to as mREITs, lend money to real estate owners and operators. The lending may be either directly via mortgages and loans or indirectly via the procurement of mortgage-backed securities (MBS). Mortgage-backed securities are investments with pools of mortgages issued by government-sponsored businesses (GSEs). Their earnings result primarily from the net interest margin—the spread between the interest they gain on mortgage loans and the cost involved in funding these loans. Because of the mortgage-centric focus of this REIT, they are potentially sensitive to interest rate increases.
Hybrid REITs business are in charge of both physical rental property and mortgage loans in their portfolios. Depending on the particular investing focus of the entity, they may weigh the portfolio to more property or more mortgage holdings.
Publicly Traded REITs gives shares of publicly traded REITs that are listed on a national securities exchange, where they are purchased and sold by each investor, they are controlled by the Securities and Exchange Commission (SEC) of the U.S.
Public Non-traded REITs are fully registered with the SEC but don’t carry out trades on national securities exchanges. Hence, they are less liquid compared to publicly traded REITs but are more stable because market fluctuations do not influence them.
Private REITs are not under the registration of the SEC as well as do not carry out trade on national securities exchanges. They work solely as private placements selling exclusively to a select list of investors.
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