REITs and all about it!
About Real Estate Investment Trusts (REITs)
REITs stand for Real Estate Investment Trusts. It is a corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity real estate investment trust ) and/or mortgage loans (mortgage REIT). Real estate investment trusts are traded on major exchanges just like stocks that pay dividends. There is usually no minimum investment for them. They have high liquidity as with stocks. They are given special tax status and have to meet certain requirements to maintain the tax status some of which include requirements for the following:
- 90% of the annual taxable income must be distributed to shareholders
- 75% or more of investments and Gross income must be in Real Estate investments, investments in other real estate investment trusts, and or Government securities
- No less than 5 people can hold 50% or more of the shareholding.
- It must have minimum of 100 shareholders.
Real estate investment trusts have a unique advantage because they give you the passive income in the real estate asset class that utilizes professional management to optimize the value of the assets while you receive maximum dividends in the form of 90% of the net income distributed to the shareholders. The professional management is also able to raise money from the capital markets and secure debt to purchase large assets. They are advantageous in that they have strong liquidity similar to stocks but yet have the security of property to protect the capital invested. The cost of purchasing the shares are often lower than equities as there often is no minimum investment required. Diversification opportunities are also available as you can purchase Real estate investment trusts within all of the real estate asset classes namely: Residential, Retail, Office, Industrial, Healthcare, Self-Storage, Hotels and Resort REITs. Let’s look at some of these:
Residential Real Estate Investment Trusts
This type of REIT specializes in apartment buildings and / or other residential properties leased to individuals. The biggest danger for residential REITs is over construction within a particular geographic area during a declining economic environment. In such cases where supply is increasing as demand is decreasing, the professional management team is forced to reduce rents to keep occupancy rates stable.
Retail Real Estate Investment Trusts
There are a number of specialties in the field of retail REITs, including malls and shopping centers. The particular benefit for the former is that construction costs are significant; measured in the tens or hundreds of millions of dollars. This high barrier-of-entry cost helps keep control expansion, making excess supply a lesser concern.
Office and Industrial Real Estate Investment Trusts
The office sector of the real estate investment trust market has historically been the largest. The primary drawback is the fact that office rents normally have much longer lease terms meaning that in times of declining rent and lower occupancy, those tenants that do sign leases will have lower, less-profitable rates locked in for many years. This can also be a blessing, however, if a property is filled during a time of short supply and high demand. Office Real Estate Investment Trusts are, as can be imagined, highly cyclical. Industrial investment trusts, on the other hand, tend to generate steady, predictable cash flow thanks to high lease renewal rates and low capital expenditure and maintenance requirements.
Creating a highly profitable and balanced investment income with a mix of Real estate investment trusts requires starting with proactive real estate in emerging markets with the right mix of Bonds, Real Estate Investment Trusts and dividend paying stocks. It will best succeed with an skillful and expert active investment management team, contact our adept team today.
