What are REITS?
As real estate investing goes mainstream, more Americans are interested in getting into it, even if they don't have millions to invest with. That's why the Real Estate Investment Trust (REIT) was created in 1960 to allow ordinary folks access to large-scale income-producing real estate.
They are a kind of mutual fund that makes it easy for you to invest in real estate of all types, like retail, office buildings, self-storage, single-family and multi-family housing, and more.
Keep reading to learn about REITs and how you can begin or enhance your real estate investing using this mutual fund.
How Does a Mutual Fund Qualify to Be a REIT?
As iterated earlier, REITs are mutual funds invested in certain real estate assets. They are a corporation, association, or trust that owns income-producing real estate. Or they can also own real-estate-related assets.
They must follow specific minimum federal tax requirements to qualify as a REIT. Some of these are:
- Invest 75% of their assets into real estate assets, at least
- Derive 75% of their income from real estate-related sources, at least
- Distribute 90% of their taxable income to shareholders annually in the form of dividends
Interestingly, due to their special tax status, REITs don't have to pay any taxes on the dividends they pay to shareholders. Many REITs will pay 100% of their income to shareholders, resulting in zero total corporate tax paid.
Many Different Kinds of REITs
There are many REITs out there, especially since they have increased due to investor interest. Nowadays, you would be remiss if you didn't invest in at least one or more REITs in your investment portfolio.
There are public and private REITs, either publicly traded on the stock exchange or privately held. There are also Equity REITs, Mortgage REITs, and Hybrid REITs.
- Equity REIT: own and operate income-producing real estate
- Mortgage REIT: provide income using mortgage-backed securities or other real estate loans
- Hybrid REIT: a mix of the two asset classes above
When you hold REITs in your investment portfolio, the dividends garnered from the REIT are taxed as they would if they were when received from any other stock. There are many tax benefits of using REITs in your portfolio, so do your due diligence regarding this attractive asset class.
Add a Real Estate Investment Trust to Your Portfolio
If you already have lots of properties in your investment portfolio and are looking to diversify your real estate investments, then a Real Estate Investment Trust (REIT) is a great way to do so. There are many kinds on the market right now, so find the one that works best with your long-term investment goals.
Also, don't forget to contact us if you need property management services for your property portfolio in Kissimmee, Florida. We will make it so you don't have to spend all your time taking care of your real estate portfolio, and you can focus on other aspects of your busy life.
Frequently Asked Questions (FAQs)
What Are REITs?
What is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns or finances income-producing real estate. Created in 1960, REITs make it possible for everyday people to invest in large-scale real estate without needing to buy property themselves.
How do REITs work?
REITs collect money from many investors and use it to purchase or finance real estate. Investors then earn income from the properties through dividends, which come from rent or mortgage payments.
What makes a company qualify as a REIT?
To be considered a REIT, a company must:
Invest at least 75% of its assets in real estate
Earn at least 75% of its income from real estate-related sources
Pay at least 90% of its taxable income to shareholders each year
This structure allows REITs to avoid paying corporate income tax on the earnings they distribute.
What types of REITs are there?
There are three main types of REITs:
Equity REITs: Own and manage income-producing properties
Mortgage REITs (mREITs): Invest in mortgages and real estate debt
Hybrid REITs: Combine features of both equity and mortgage REITs
Are REITs publicly traded?
Some REITs are publicly traded on stock exchanges, while others are privately held. Publicly traded REITs offer greater transparency and are easier to buy and sell.
How are REIT dividends taxed?
Dividends from REITs are generally taxed as ordinary income. However, some investors may qualify for a tax deduction under the Qualified Business Income (QBI) rules, depending on how and where the REIT is held.
Why should I consider investing in REITs?
REITs offer a convenient way to invest in real estate without managing property. They provide diversification, regular income through dividends, and potential for long-term growth.
How can I start investing in REITs?
You can invest in REITs through a brokerage account just like you would with stocks or mutual funds. Research REITs that align with your investment goals and risk tolerance.
