REIT stands for Real Estate Investment Trust. A REIT is a company that owns and operates income-producing real estate or related assets. Everything from investment apartment buildings, hotels & resorts, office buildings, shopping malls, warehouses, to related assets like mortgages and loans. Here is some more information on one popular type of investment for passively investing in real estate, REITs.
A few basic facts.
As an investor, you invest your money in the REIT and provide the company with the capital they need to purchase, own and operate properties. In return, the REIT pays out regular dividends to investors from the income it generates from those properties. By the way, REITs are regulated by the Securities & Exchange Commission (SEC) in the US, and are required by law to distribute at least 90% of their income to investors!
REITs enable investors to include real estate in their investment portfolio and earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy real estate.
Types of REITs
The main type of REIT, and the type that most investors start with, are publicly traded REITs. They are required to file with the SEC, and shares in publicly traded REITs are traded on national stock exchanges just like any publicly-traded stock. The minimum investment is one share. As they are publicly traded, there is a lot of publicly available information and analysis about these REITs that you can review. While publicly-traded REITs can be bought and sold from one day to the next, investing should generally be seen as a long-term endeavor. Transaction costs are similar to the brokerage fees you would pay when buying and selling other shares.
Non-traded REITs also file with the SEC, but the shares are not traded on stock exchanges. Most will require a minimum investment amount and will specify a minimum holding period. It’s generally harder to keep track of your investment since there is just less publicly available information and analysis out there about the company and its investments. Transaction costs are opaquer with non-traded REITs because they are whatever the company decides they should be. Make sure you get a clear disclosure on transaction costs before deciding to invest.
Finally, private REITs. Private REITs file less regularly with the SEC than the other kinds. Investment is usually through private placement, and generally only open to accredited investors. So, unless your annual earnings are above $200,000 ($300,000 for married couples) or your net worth is at least $1m, we can put this kind of REIT on the backburner for now.
Taxes and REITs.
REITs are not subject to double taxation, this means REITs are not taxed at the entity level, but investors do pay taxes on dividends received. Compare this to owning shares in some other type of company – the company pays taxes, and investors pay taxes on investment income received, that is, twice. In exchange for only getting taxed once, the income that shareholders of a REIT receive is taxed as ordinary income and not at the reduced tax rates applicable to dividends from other companies. In short, “you win some, you lose some.” While the attractive returns that REITs pay may outweigh any negative impact on your tax bill, you should do your research and consult a tax adviser.
Some pros and cons, and other important stuff.
- REITs, especially publicly-traded REITs, are easier to buy and sell than traditional real estate. When you purchase real estate, your money is tied up in the property until you sell it.
- Investing directly in real estate does offer more tax breaks than a REIT investment. With your own property, you also directly control how your property is managed. REITs are for people who want a passive income from real estate without the hassle of managing it.
- Not all REITs are the same. Some will invest in a range of property types, while others will specialize in a specific category. Some invest in properties, while some invest in mortgages and loans. They also invest in different real estate markets. So, read the prospectus and understand what kind of real estate the REIT is investing in and where to determine if it fits your investment strategy and risk profile.
- Avoid getting scammed! You can always verify the registration of publicly traded and non-traded REITs through the SEC’s EDGAR System.
We recently published an article here about earning passive income from real estate investing. To sum up the core argument in that article, we said it is possible to invest in real estate to earn passive income, but it’s also a good idea to understand how each investment works, the risk involved and how much of that risk you’re comfortable with. This post was written with the author Wendy Noble from Fiverr. I hire Fiverr writers to write posts on areas they are proficient, bringing you more relevant content and helping us all learn a bit more about various topics. Subscribe for more business, sales and investing posts. Have a lovely day.
