Investing in real estate today is not as hard as it used to be some years ago. This is because many investment opportunities have been explored and introduced to accommodate to the various needs of investors. If you are a potential real estate investor who still lacks the funds necessary to buy a rental property, many methods are emerging nowadays that do not require you to have a lot of money – or even any – in order to invest in real estate. In a previous blog on Mashvisor, we have explored various methods that you could use to invest in real estate with little money such as Real Estate Investment Trust (REIT), wholesaling, and the use of hard/private money, to name some. What is REIT? Investing in REITs, in particular, is a great way to get your feet into real estate if you are wanting funds. Whether you are a millennial or an amateur in the real estate game, you can and hold the right to invest in a Real Estate Investment Trust. Not only will you be able to build upon your real estate investing knowledge, you will also grow and expand your income stream as you engage in REITs. Although the question remains to what is REIT, in the following section we explain what is REIT and how good of an investment it could be for you.
What Is REIT?: The Emergence of REITs
In 1960, the Congress sought the need to help individuals and give them the opportunity to benefit from income-producing real estate. The Congress granted then legal authority to form REITs and 5 years later, the first REIT was listed on the New York Exchange (NYSE). Following the United States, the first European REIT legislation was passed in the Netherlands in 1969, in Australia in 1973, and in Canada in 1993. REITs nowadays can be publicly shared and traded, publicly shared but not traded, or remain a private entity. REITs are now traded worldwide as more people have become aware of the advantages they offer.
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What Is REIT?: Definition
What is REIT? REIT is a type of security that invests in real estate and often trades on a major stock exchange like a stock. Shareholders benefit from owning a stock, and so do stockholders of REITs. A stockholder of REIT earns a share of income produced from investing in real estate without having to buy or finance a property. REITs provide investors with liquidity while offering special tax considerations. REITs are classified into two categories: mortgage REITs and equity REITs. What is REIT? Equity REITs? Equity REITs invest in and own properties with revenues mainly coming from renting or leasing space. In an equity REIT, an investor enjoys a wide range of properties to select from, including offices, shopping centers, hotels, and apartments. Mortgage REITs, on the other hand, invest in and own property mortgages. They get most of their revenue from interest earned on their investments in mortgages or mortgage-backed securities. Since mortgage REITs rely heavily on interest, an increase in the interest rate can be risky. Vigilantly, however, while continuously seeking out the fluctuations in this market, you will be able to lessen the risk burden.
What Is REIT?: Requirements
IRS is the sole entity that implements REIT rules and oversees REIT qualifications. The main requirements that will qualify you for a REIT are:
- At least 75% of the corporation’s income must be earned from real estate as rent, from real estate interest, or from the sales of real estate assets;
- At least 75% of the corporation’s assets must be real estate assets; and
- At least 95% of income must be passive.
What Is REIT?: Why REITs?
REITs work like a mutual fund in a way where big and small investors invest in a pooled, managed property. REITs enable investors to own a share of the value of the property, while also earning income from leasing it. You’re essentially investing in a physical asset with an extended life span and earning a monthly income for leasing it. This method has become advantageous and of predilection for the average investor who doesn’t have big capital or free time. Another advantage of REITs is the diversification of your real estate investment portfolio that the nature of this method has generated. Of course, the more diverse your investment portfolio is, the fewer the risks associated with it. Because the funds of REITs are pooled together, high level of diversification is achieved.
Last but not least, what makes REITs more desirable is that REITs distribute nearly 90% of their yearly taxable income to shareholders as taxable dividends. This means that REITs do not pay taxes at the corporate level, but instead each investor incurs an individual income tax on the portion of the dividend. The high distribution, furthermore, limits out retained earning while offering REIT stockholders more profitability.
But What Is REIT? And How Would I Benefit?
REITs allow both small and large investors to acquire ownership in real estate ventures. In some cases, investors operate commercial properties. The advantages of having a diversified investment portfolio, owning a share of a property while earning an income on it, and enjoying tax advantages have incentivized potential investors to invest in REITs. Today, many types of REITs have become widely available, whether you’re looking for listed and publicly shared, listed but not publicly shared, or private REITs.
If you are looking for a REIT, you should consider the following factors: management, diversification, and earnings. As you decide to invest in real estate properties along with other investors, assessing the management team and its track record becomes vital. It’s solely the management team’s role to pick the right investment and decide upon the best strategies that will derive profitability and land appreciation. Remember, management remains of utmost importance! Diversification is also important because the more diverse the REIT, the fewer the risk burden. Look for a REIT which has balanced investments across commercial, residential, and mortgage real estate. Finally, as far as earnings, consider looking into funds from operations and cash available for distribution. The aforementioned numbers will help you assess the performance of the REIT. Now that you know what is REIT, ensure to consider the following factors and unfold an experience full of earnings.
For more advice on everything real estate related, keep reading on Mashvisor.