Tuesday, October 6, 2009

The Truth about REITs: About Real Estate Investment Trusts

REITs are corporations that primarily own and usually operate real estate that generates revenue, including hotels, commercial office buildings, rental homes, apartment complexes, etc… REITs may also finance real estate and many have their shares traded on major stock exchanges.

Here are the answers to commonly asked questions about REITs

What is required to be considered a REIT?

To qualify as a REIT, a corporation must comply with the provisions of the Internal Revenue Code. According to the Tax Code, a REIT is required to:

• Pay annually at least 90 percent of its taxable income I the form of shareholder dividends
• Be managed by a board of directors or trustees
• Have a minimum of 100 shareholders
• Invest at least 75 percent of its total assets in real estate assets
• Have shares that are transferable
• Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year
• Derive at least 75 percent of its gross income from rents, from real property or interest on mortgages financing real property
• Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries
• Be an entity that is taxable as a corporation

Why were REITs created?

REITs allow individuals and families to be involved in large-scale investment opportunity. United States Congress established REITs in the 1960s to give less established investors the opportunity to invest in large-scale, income producing real estate. Congress determined purchasing equity – as it is done with other industries – would be the best way to give average investors the chance to purchase large scale commercial real estate.

Access to these real estate investment opportunities was limited to wealthy individuals and institutions before Congress became involved.

Are there different types of REITs

Yes, there are many different types of REITs with shares being traded on major stock exchanges daily, which make them different from traditional real estate investing.

REITs are classified into three separate categories:

Equity REITs own and operate revenue generating real estate. Properties are purchased or developed to operate and keep in portfolio, not for resale. They are held as long term investments.

Mortgage REITs lend money to real estate owners or extend their credit by purchasing loans or mortgage-back securities. They generate revenue based upon the interest in mortgage loans and are considered to be a good speculative if interest rats are predicted to decrease.

Hybrid REITs owns properties as well as make loans to real estate owners and property managers.

Are REITs considered to be good investments?

Yes, REITs are considered to be a good investment. REITs are a great investment that diversifies your portfolio and reduces risk.

Their dividends are usually high and there is great potential for moderate, long term appreciation. Compared to other investment options, over time the return on REIT stocks produce slightly less return than a high risk investment, but more than a low risk bond.

REIT dividends come from the rent paid by those who occupy the REITs properties, which is considered to be a fairly stable revenue stream. Annually REITs shareholders receive at least 90 percent of their taxable income, sometimes, paid out monthly. Due to the fact rental rates tend to increase during periods of inflation, REIT dividends are usually protected from the negative effect of rising prices. Other benefits or REITs include:

• Liquidity: Shares of publicly traded REITs are easily converted into cash because they are traded on Wall Street
• Professional Management: The managers of your REITs are trained and experienced real estate professionals
• Oversight: Independent directors of the REIT, independent analysts, independent auditors, and the business and financial media watch over a public traded REITs financial reporting regularly. Such oversight provides investors with a comfortable level of protection because multiple sources are looking at the REITs financial condition
• Disclosure Obligations: REITs whose securities are registered with the Securities and Exchange Commission are required to make regular disclosures, including quarterly as well as annual financial reports.

How are REIT dividends handled for tax purposes?

Dividend distributions for tax purposes are allocated to ordinary income, capital gains and return of capital, each of which may be taxed at a different rate.

What types of people tend to invest in REITs?

All types of investors find REITs to be an excellent investment to have in their portfolio. They include new investors with no previous investment experience; intermediate investors with some experience; highly experienced investors; exchange traded funds; pension funds; endowments; foundations; insurance companies; and bank trust departments.

What should I keep in mind when investing in a REIT?

Corporations that demonstrate consistent earnings and dividend growth are rewarded by the marked with higher price-earnings multiples. Keep these factors in mind when investing in REITs: the strength of their management team; a demonstrated ability to increase revenue consistently, and an effective operating structure.

Are there any professional groups that advocate on behalf of REITs?

Yes, The National Association of Real Estate Investment Trusts was established as a trade association created to represent US REITs and publicly traded real estate companies. The National Association of Real Estate Investment Trusts is comprised of companies, academics, and industry professionals. The organization’s primary purpose is to advocate for, and help promote, the industry and REITs.

How can I Invest in a REIT?

You can invest in one of many publicly traded REITs located on the major stock exchanges by purchasing shares. The highly specialized experts at REITBuyer.com can help you make your investment.

As with any publicly traded security, investors can purchase common stock, preferred stock or debt securities. Our real estate investor specialists can help you analyze your financial objectives and recommend the appropriate investment for you.

REITbuyer.com is an online brokerage information site specializing In REITs and Real Estate Mutual Funds – The World’s first and only site dedicated to REITs Real Estate Mutual Funds. This is a place for the small investor to own a piece of world class real estate.