Investment StrategiesWhat Is a Real Estate Investment Trust (REIT)? by Onerent October 23, 2016February 11, 2019 by Onerent October 23, 2016February 11, 2019A REIT or Real Estate Investment Trust is a company that owns or finances income-producing real estate. Created by the Real Estate Investment Trust Act of 1960, REITs allow a broad range of investors to enjoy rental income from commercial property.To qualify as a legitimate REIT in the eyes of the law, 75 percent of the Trust’s income must be derived from rents on real property, tenant’s reimbursements for property tax abatements and refunds, interest on real estate mortgages, distributions from other REITs (yes, a REIT can invest in another REIT), gains on the sale of real estate and mortgages not held primarily for sale to customers, income from shared appreciation mortgages, commitment fees and qualified temporary investment income.Some of the advantages of REIT investments include:High YieldsChief among the benefits of REITs are remarkably high yields. According to Morningstar, in September of 2012 the average yield for REITs was 4.3 percent. This well outpaced the S&P 500 Index, even though yields were down from their longer-term average, which is typically in the seven to eight percent range.Simple TaxesTax issues are pretty straightforward. In a nutshell, dividends are allocated to ordinary income, capital gains and return of capital. REITs are not taxed directly, which avoids double taxation. Investors are taxed at their individual rate for the ordinary income portion of the dividend. Capital gains only come into play if the Trust sells assets at a profit. Return of capital is applied to reduce the shareholders cost basis in the stock. When shares are sold, the difference between the share price and reduced tax basis is taxed as a capital gain.Related: Tax Deductions Every Landlord Should be MakingExcellent LiquidityREIT shares are bought and sold on a stock exchange. This makes shares considerably more liquid than actually owning property. Additionally, buying and selling property involves considerably higher expenses and requires a lot more effort than simply buying and selling shares of a trust.On the other hand, there are some drawbacks to consider:Demand SensitivityRising interest rates tend to make other investments more attractive, which draws investors out of REITs into instruments like Treasury Securities. When investors sell to move into more attractive investments, share prices take a hit.Property TaxesREITs, as holders of real estate, must pay property taxes. In some cases, this can amount to as much as 25 percent of total operating expenses. And these are not fixed costs; states and municipalities can raise taxes at will to soften their own shortfalls. This siphons cash flow away from investors.Tax RatesThose high yields can result in high tax liability. Because REIT dividends are considered ordinary income, they are subject to a much higher tax rate than the typical 15 percent attached to standard dividends.As is true for most investments, whether the advantages outweigh the downsides varies according to individual situations. It’s always best to stick to your business plan.This article has been contributed by our friends at Onerent. Start Your Investment Property Search! START FREE TRIAL Guest BlogsREITs 0FacebookTwitterGoogle +PinterestLinkedin OnerentOnerent is a rental leasing and management service for the modern owner and renter, managing over 1,000 properties across the San Francisco Bay Area and Greater Seattle. Onerent offers free real estate education and resources on the Onerent Blog. Find answers to all your legal, maintenance, finance, and leasing questions as well as real estate news affecting the housing market. Previous Post The Best Time for Buying Real Estate Investment Properties Next Post When should you remortgage to buy a rental property? Related Posts FAQ: How to Make a Lot of Money in Real Estate Investing? Real Estate Investing 101: Short Term Investment Strategies 7 Things Every First-Time Investor in a Foreclosed Property Should Know Why a Residential Real Estate Investment Is the Go-To Option What Are the Best Types of Real Estate Properties for Investing? Is Becoming an Airbnb Super Host Feasible?: Less Obvious Tips and Tricks Airbnb Investment or Traditional Investment: How to Determine The Optimal Strategy Should You Invest in Airbnb Scottsdale in 2018? I am Selling Investment Property. What Should I Do With The Money? How To Pick The Best Investment Property Strategy For You The Advantages and Disadvantages of a Real Estate Limited Liability Company What Are the Best Low Risk Investments in Real Estate?