Part three of our Real Estate Investing Basics series is all about Real Estate Investment Trusts, also known as REITs. Let's dive in and discover what a REIT is, how they are used, and what the pros and cons are in comparison to the other real estate investments we have talked about.
What is a REIT?
REITs were created by Congress in 1960. This was done to give everyday people the benefits of owning real estate. REITs are companies, treated by the IRS as corporations, who own various types income-producing real estate investments. Investors can buy into these companies by purchasing shares, which in many cases are publicly traded like stocks. They are modeled after mutual funds and bought and sold in many different ways.
There are four major types of REITs: Equity, Mortgage, Public Non-Listed, and Privately Held REITs.
Equity REITs are made up of mixed-use, multi-family, office and commercial use buildings. They retain their income from rents produced by the buildings themselves.
Mortgage REITs contain mostly residential and some commercial buildings. They retain their income from interest earned on mortgages or mortgage-backed securities.
Public Non-Listed REITs or PNLRs are REITs that are registered with the SEC, the securities and exchange commision, which oversees the stock market. However, PLNRs do not get publicly traded like stocks.
Private REITS are REITs that are privately held and they are not required to be registered with the SEC.
Most REITs are publicly traded and some are held privately, but all REITs must operate under specific rules. Some of those are:
Held by shareholders
Must primarily own or finance real estate
75% earned income must be real estate backed
95% income must be passive
Pay at least 90% of taxable income to its shareholders in dividends
Have more than 100 shareholders
As stated above, REITs are a way for the everyday person to get into real estate investing. Instead of coming up with a large down payment and managing a property, investors can purchase a share of the corporation at a much lower price. This type of investing is a real estate investment; however, it is much more passive than other methods. People are drawn to the REITs because they don't want to deal with managing a property, tenants, and markets. If you are looking to control the asset and make bigger gains then stay tuned for our other real estate investing strategies.
Matthew Lindsay is the owner of Precision Home Group at Re/Max Dynamic Properties, based in Anchorage, Alaska. He has a network of over 115,000 RE/MAX Realtors in 100 countries. No matter if you’re near or far, Precision Home Group can help you get connected with the best agents around the globe.