REITs - What should we know before starting investing?

A real estate investment trust, also known as REIT, is a company that deals with income-generating properties. As with mutual funds, REITs pool investor capital together. This allows for individual investors to receive dividends from real estate investments without the hassle of managing, financing, or making purchases themselves.

In 1960, Congress made an amendment to the Cigar Excise Tax Extension, which established REITs. These allow investors to purchase shares in commercial real estate portfolios, a privilege previously only accessible to wealthy individuals and through large financial intermediaries.

REIT portfolios consist of various properties, including apartment complexes, data centers, healthcare facilities, hotels, infrastructure, office buildings, retail centers, self-storage, timberland, and warehouses. Typically, REITs specialize in a specific real estate sector, but diversified and specialty REITs may hold different types of properties. REITs are publicly traded on major securities exchanges, allowing investors to buy and sell them like stocks throughout the trading session. These REITs typically trade under substantial volume and are considered liquid instruments.

The business model of most REITs is straightforward. They lease space and collect rents on the properties, then distribute that income as dividends to shareholders. Mortgage REITs, on the other hand, finance real estate but don't own it. They earn income from the interest on their investments.

For a company to qualify as a REIT, it must comply with certain provisions in the Internal Revenue Code (IRC). These requirements include owning income-generating real estate for the long term and distributing income to shareholders as its primary activity.

To qualify as a Real Estate Investment Trust (REIT), certain requirements must be met. At least 75% of total assets must be invested in real estate, cash, or U.S. Treasuries. REITs must also derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales. In addition, they must pay a minimum of 90% of taxable income in the form of shareholder dividends each year. REITs must be an entity that's taxable as a corporation and managed by a board of directors or trustees. They must have at least 100 shareholders after their first year of existence and no more than 50% of its shares held by five or fewer individuals.

There are three types of REITs: equity, mortgage, and hybrid.

Equity REITs own and manage income-producing real estate, with revenues generated primarily through rents.

Mortgage REITs lend money to real estate owners and operators, earning primarily through the net interest margin. This makes them potentially sensitive to interest rate increases.

Hybrid REITs use investment strategies from both equity and mortgage REITs.

Investors can purchase shares of publicly traded REITs, as well as REIT mutual funds and REIT exchange-traded funds (ETFs), through brokers. The same goes for non-traded REITs, which can be bought via participating brokers or financial advisors. An increasing number of defined-benefit and defined-contribution investment plans now also incorporate REITs. According to REIT research firm, Nareit, an estimated 145 million U.S. investors either hold REITs directly or through their investment funds and retirement savings.

REITs offer benefits and drawbacks as part of an investment portfolio. They provide strong, stable annual dividends and potential for long-term capital appreciation. REIT total return performance has outperformed various indices and inflation over the last two decades.

REITs are easy to buy and sell, as they often trade on public exchanges. They offer attractive risk-adjusted returns, stable cash flow, diversification, and high dividend-based income. The Tax Cuts and Jobs Act of 2017 provides taxpayers with a QBI deduction for qualified REIT dividends or taxable income minus net capital gains.

However, REITs do not offer much in terms of capital appreciation. As a requirement, 90% of income must be paid back to investors, leaving only 10% for reinvestment. REIT dividends are taxed as regular income, and some REITs have high management and transaction fees.REITs offer benefits and drawbacks as part of an investment portfolio. They provide strong, stable annual dividends and potential for long-term capital appreciation. REIT total return performance has outperformed various indices and inflation over the last two decades.

REITs are easy to buy and sell, as they often trade on public exchanges. They offer attractive risk-adjusted returns, stable cash flow, diversification, and high dividend-based income. The Tax Cuts and Jobs Act of 2017 provides taxpayers with a QBI deduction for qualified REIT dividends or taxable income minus net capital gains.

However, REITs do not offer much in terms of capital appreciation. As a requirement, 90% of income must be paid back to investors, leaving only 10% for reinvestment. REIT dividends are taxed as regular income, and some REITs have high management and transaction fees.