REITs: Advantages of Real Estate Investment Trusts

Created as a populist response to the elite nature of real estate investment prior to 1960, Real Estate Investment Trusts are a means for those of modest financial standing to invest in real estate while profiting at the same rates as those who invest larger amounts of money.  In 1960, Congress passed the Real Estate Investment Trust Act that exempted REITs from corporate income tax to encourage average Americans to pool their resources together as companies who acquire real estate assets equivalent to those of the nation’s elite upper class. 

A REIT purchases, develops, manages, and sells real estate with the money pooled together from many investors.  Acting as intermediaries, the Real Estate Investment Trust manages properties while passing the profits on to the investors.  In order to keep from being taxed, REITs must adhere to the following principles;

• Distribute at least 90% of the annual taxable income to shareholders.
  
  
• Invest at least 75% of assets in real estate, mortgage loans, government securities, shares in other REITs, or cash.
  
  
• Derive 75% of income from mortgage interest, rents, gains from property sale.  95% of income must come from the aforementioned sources, combined with interest, dividends, and gains from securities sales.
  
  
• Have at least 100 shareholders.  Have less than 50% of shares in hands of five or fewer investors.

REIT Advantages

REITs provide an advantageous and safe way for an average person to invest in real estate with a modest amount of money that will garner the same return percentage as a larger investment.  The ability for an investor to only put in a few hundred dollars eliminates the need to borrow funds and take out loans, thus minimizing personal risk and liability if the project doesn’t work out.  REITs also employ real estate professionals to manage the properties, so that it is possible for someone who has less than expert knowledge on the real estate industry to invest in property for profit.

Easier for the layman to comprehend, Real Estate Investment Trusts operate on a simple business plan, profiting by raising rents and increasing occupancy in the trust’s properties. As public companies, REITs are traded publicly on major exchanges that make it easier to buy and sell shares.  Investors in REITs also have more ease in converting their assets into cash (liquidating) than those who invest in traditional real estate.  REITs are also reliable sources of revenue, as their held properties are commercial real estate with tenants who sign long-term leases (traditionally, office real estate investment is the preferred form of REIT investment). 

 

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