A Real Estate Investment Trust, also known as a REIT, is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification, and long-term capital appreciation. REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through purchasing stocks. In total, REITs of all types collectively own more than $3 trillion in gross real estate assets across the U.S., with stock-exchange listed REITs owning approximately $2 trillion in assets, represented in more than 1 billion square feet of office, retail, industrial, and lodging space.
1. How do REITs work?
REITs work by pooling the capital of numerous investors. This makes it possible to purchase a diversified portfolio of real estate investments. A corporation or trust that qualifies as an REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs target to payout at least 100% of their taxable income to shareholders.
2. What types of REITs are there?
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There are three types of REITs: Equity REITs, Mortgage REITs, and Hybrid REITs. Equity REITs generate income through the collection of rent on, and appreciation of, owned properties. Mortgage REITs invest in mortgages and earn income from the interest on these investments. Hybrid REITs combine the investment strategies of Equity REITs and Mortgage REITs.
3. What makes REITs a good investment?
REITs offer a way for individuals to invest in large-scale, income-producing real estate. They provide a liquid method of investing in real estate, an industry known historically for its illiquidity. Additionally, REITs typically provide high dividend yields and the potential for moderate, long-term capital appreciation.
4. Can you lose money in a REIT?
Yes, just like any investment, there is the potential for loss when investing in REITs. Factors like economic conditions, property management performance, property location and market demand can all affect the overall profitability and, consequently, the stock price of a REIT.
5. How are REITs taxed?
REITs are taxed differently than most investments. They are required to distribute at least 90% of taxable income to shareholders who then pay tax on the dividends at their individual tax rates. However, some dividends may be classified as qualified dividends or capital gain distributions, which would be subject to lower rates.