Real estate investment trusts, or REITs, are a type of investment. They can be a helpful addition to your current portfolio. In this article, we will go over what exactly real estate investment trusts are and how they work for investors.
REITs are entities that invest in income-producing real estate. Typically, this is done through owning or financing real estate. The type of property owned tends to be office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, mortgages, or loans. Their purpose in developing real estate is not to resell it, but to operate it as an income stream. This income usually comes in the form of rents. Many real estate investment trusts are on the stock exchange, making them readily available to investors.
A company must meet certain qualifications to be a Real Estate Investment Trust. These include:
- At least 75% of total assets must be in real estate
- At least 75% of the company’s gross income must come from real estate related sources. This can be rents, interest on mortgages, or real estate sales.
- A minimum of 90% of the company’s income must be paid to shareholders as dividends
- Hold a corporate tax status
- Must be managed by a board of directors or trustees
- Have 100 or more shareholders
- 5 people or less cannot hold more than 50% of the shares
Investing in REITs
Real estate investment trusts allow you to invest in real estate without having to purchase or manage real property. You invest in REITs the same way that you would invest in companies from other industries. You can do this through stock, mutual funds, or EFTs. When you invest in a REIT you make your money off the dividends that the company pays out. Many people like to invest in REITs because dividends are more likely than with other investments due to the requirement to pay out 90% of the income to shareholders. It is important to note that taxation is a bit different on real estate investment trust dividends. When you pay your taxes, these dividends have a taxation rate that is the same as your ordinary income rate. You will not receive the reduction in tax rates that some other types of dividends receive.
How to Start
If you have an interest in investing in real estate investment trusts, you may wonder how to start. The best way to do this is by meeting with a qualified investment advisor who can help you to incorporate REITs into a well-balanced investment portfolio.
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