Introduction to REITs

Introduction to REITsBy Toma Franklin, Staff Writer

What are REITs?

A Real Estate Investment Trust, or REIT, is a real estate company that offers common shares to the company, thus giving those on the “outside” the opportunity to invest in stock that might otherwise be unavailable to them. While a REIT is similar to any stock that represents ownership in an operating business, there are two features unique to an REIT that similar types of stock do not share. With REITs, its primary function is to manage groups of income-producing properties, and it must distribute most of its profits as dividends.

Why Were REITs Created?

REITs were created by Congress in 1960 to make investments in large-scale, income producing real estate available to smaller, private investors. REIT investing affords diversification and the opportunity to own a share of equity (in some cases) in certain properties.

What Is the Tax Status of REITs?

In order to qualify as an REIT, a real estate company must agree to pay out in dividend s at least 90% of its taxable profit and fulfill other requirements imposed by the IRS. Real Estate companies that have REIT status are exempt from corporate income tax, since while another regular corporation makes a profit from the investments and then pays taxes on the entire amount of that profit, and decides how best to allocate the after tax profits, an REIT simply distributes most of its profits.

What Kind of Asset Is REIT Stock?

REIT stocks are dividend—paying stocks that focus on real estate, and should be considered to be in the same category as high yield bond funds and dividend paying stocks. Those who commonly pick stocks to invest have undoubtedly heard the terms top-down and bottom up analysis, with top-down focusing on perspectives and bets on themes or sectors (like demographics) while bottom up analysis is more focused on fundamentals of specific companies. From a top-down perspective, REITs are affected by anything that can impact the supply of and demand for property, and interest rates can vary widely since these rates are also determined by, and closely tied to, the supply and demand of property, and the current status of the economy.

What Should Investors Look For In an REIT?

At the individual REIT level, investors should look for prospects for growth in revenue, especially rental income and any related service income, since it is important to determine whether or not an individual REIT has a unique and viable strategy in place for improving occupancy and raising rents. This is because REITs, being real estate types of ventures, naturally grow by the acquisition of properties, and if an REIT is currently unable to improve occupancy and raise rents, they may be unable to expand in the future. What Are The Types of REITs?

Equity REITs:

Most REITs focus on what is known as the “hard asset” business of real estate operations, and these are known as Equity REITs. These REIs normally specialize in owning certain types of buildings, such as apartments, malls, office buildings, and hotels, and some are more diversified, and have expanded into golf course and other recreational facility types of ownership.

Mortgage REITs:

Mortgage REITs represent less than 10% of REITS, and these types focus on making loans secured via real estate properties, but do not generally own or operate real estate themselves. Investing in these types of REIs is usually considered slightly less high risk than investing in other types, but individual REIs can vary by company, so it is best to investigate any type of REI fully before investing.

Hybrid REITs:

Some REITS are classified as “hybrid,” because they run real estate operations and transact mortgage loans. Hybrids are not currently very common, but they are growing in numbers as more real estate companies begin to seek greater profits and investment appeal through wider diversification.

Should Home Owners Invest In REITs?

In the majority of cases, the investment of REIT stocks can enhance the benefits of home ownership. Home ownership is different from other investments since a house is as much of an expenditure as it is as investment, particularly when you facture in a mortgage, (and regular mortgage interest) real estate tax, insurance payments, and other costs of maintaining a home. Investing in REITs, in addition to creating portfolio diversification, will in most cases lead to greater real estate investment total return, since most of the costs associated with personal property ownership are not associated with REIT investing.

How Can I Invest In an REIT?

Any individual may invest in a publicly traded REIT, since they are listed on major stock exchanges. This is done by purchasing shares via a stockbroker. This is when the services of a financial planner become invaluable, since there are many types of stock available for purchase, and a financial planner will be able to recommend the REIT investments that are appropriate for an individual’s situation. Potential investors should also contact the REIT directly for a copy of the company’s annual report and prospectus, before investing.

REIT Investing: Know Your Options

REIT investing is just one of the many investment opportunities available for individuals wishing to build or diversify their portfolios. It is important to remember that an REIT is a real estate corporation or company, and that the philosophy, strategies, viability, and performance of the company directly affects the performance of REIT stock shares. It is important to research and plan carefully before investing in this or any type of real estate venture, and your certified financial planner is your best resource for this type of situation.