REIT FAQs

Real Estate Investment Trusts (REITs) are entities that buy and manage large-scale real estate properties and projects, as well as lend money for real estate mortgages. They offer investors the ability to own shares in a diversified portfolio of real estate properties while at the same time reaping the benefits of dividend income and holding a liquid asset. Here are answers to a few of the frequently asked questions about REITs.

What Is A REIT?

A REIT is a corporation with a special tax designation that owns and operates real estate properties such as shopping centers, apartment buildings, offices, warehouses and hotels. Some REITs also lend money for mortgages. There are any public REITS whose shares can be bought and sold on the major stock exchanges.

How Does A Corporation Qualify To Be A REIT?

To qualify as a REIT, a corporation must comply with specific provisions of the Internal Revenue Code. The provisions include:

• The entity must be a taxable corporation
• The corporation must be managed by trustees or a board of directors
• The entity must have fully transferrable shares
• There must be at least 100 different shareholders
• No more than 50 percent of the corporation's shares can be held by five or less individuals within the last half of the taxable year.
• At least 75% of the corporation's assets must be real estate assets
• At least 75% of the corporation's gross revenue must derive from real estate income such as rents from rental property and/or interest from mortgage loans

Pay out a minimum of 90 percent of taxable income as dividends to shareholders

How Many REITs Are There?

There are approximately 170 public REITS registered with the SEC that trade on the major stock exchanges. Most of them trade on the New York Stock Exchange and have an overall equity market capitalization of almost $350 billion. There are also non-traded REITs registered with the SEC, as well as private REITs.

What Types of REITs Are There?

There are three major categories of REITs:

1. Equity REITs
Equity REITs own and manage real estate. Their major source of revenue is rents from the properties.

2. Mortgage REITS
Mortgage rates lend funds for mortgage loans or purchase mortgage-backed securities. The major source of income is from earning interest on the loans.

3. Hybrid REITs
A hybrid REIT combines elements from both the equity and mortgage REIT. A hybrid REIT can both own and manage property as well as offer financing for real estate loans and hold mortgage-backed securities.

What Are The Benefits To Investing in REITs?

REITs offer both stable income in the form of dividends and also have a potential for long-term capital gains when properties are sold. Investors have the ability to own shares in a diversified portfolio of commercial real estate properties that they would not be able to provide on their own. Publicly traded REITS also offer the benefit of being a liquid asset that can be bought and sold on major stock exchanges, unlike the properties themselves which are illiquid.