Purchasing income-generating assets such as real estate can be a very effective way of increasing your wealth. However, if you want to build up your property portfolio but do not have enough capital, or if you do not want the headaches and responsibilities of collecting rent and maintaining the properties by being a landlord, then a Real Estate Investment Trust (REIT) might be your best option.
Sometimes called ‘real estate stock’, REITs (pronounced like ‘street’) are corporations that own, and most often manage, a wide portfolio of real estate properties containing commercial as well as residential properties. Such assets include apartment and office buildings, warehouses, hospitals, shopping malls and hotels. UK REITs tend to specialise in specific asset classes such as industrial, commercial or residential properties.
Since REITs often invest in commercial properties with long leases, the revenue they generate can offer a relatively safe and predictable income stream.
Anyone can buy shares in a publicly traded REIT and from the large funds accumulated, corporations buy and manage properties on behalf of their shareholders. Investors own a portion of a managed pool of real estate assets and in return, they receive a portion of the income generated from such funds in the form of renting, leasing and selling properties. A major reason for the increased popularity of REITs, is because for a very small investment, it is possible to indirectly own a wide variety of income-generating real estate assets, and benefit from the economic stability that a diversified property portfolio can give you.
Some REITS focus on financing real estate. So, there are two categories of REITs: equity REITs (EREITs), and mortgage REITs (MREITs).
- Equity REITs (EREITs): These companies buy, own and manage income producing assets such as apartments buildings, office buildings, and shopping malls. EREITs buy or develop real estate to operate within their portfolios, unlike other property developers who buy or develop real estate for resale. EREITs are normally publicly traded, and might include investments in residential, commercial or hospitality real estate.
- Mortgage REITs (MREITs): These companies finance property mortgages, or buy existing mortgages, or mortgage-backed securities. Such companies generate income from the interest created by these loans.
There are even hybrid REITs which are combinations of both equity REITs and mortgage REITs. Consequently, hybrid REITs earn income through a combination of rents and interest.
REITs can also be closed–ended or open–ended. A closed–ended REIT can only issue a fixed number of shares to the public once, by putting out an initial public offering (IPO). Any additional shares, which dilute the stock, can only be issued with the approval of the current shareholders. Open–ended REITs can issue new shares and redeem shares at any time.
A REIT must distribute at least 90% of it’s taxable earnings to it’s shareholders. Most REITs pay out 100% of their taxable earnings, and these are referred to as pass-through entities. Most REITs are exempt from corporation tax, and such tax liabilities are passed through to it’s shareholders. This can make for very efficient tax savings, since investors are only taxed once and taxes can be deferred until the income is paid out.
Another reason for the popularity of REITs is that they can be openly traded on the stock exchange. Consequently, these shares offer the opportunity for long term investment, as well as short term speculation.
Real Estate Investment Trusts (REITs) are a very popular vehicle for investing. They offer investors the opportunity to diversify their portfolios and benefit from a wide range of real estate income-generating assets, without the headaches and responsibilities of being a landlord. Shareholders can receive income from renting, leasing and selling properties. REITs have significant tax advantages too. REITs are openly traded on the stock exchange, and they are excellent instruments for long term investment, as well as short term speculation.