Real Estate Investment Trusts (REIT’s)

A REIT or Real Estate Investment Trust, is a unique type of company that allows investors to pool their money to invest in real estate assets. Some REITs simply buy properties and rent them to tenants, others develop properties from the ground up, and some don’t even own properties at all, choosing to focus on the mortgage and financial side of real estate.

When a Real Estate Company decides to form a Real Estate Investment Trust, it becomes the Sponsor for the REIT and appoints a Trustee. The Trustee holds the Real Estate Assets of the Trust in its Trusteeship and these assets are no longer directly controlled by the Sponsor. A REIT may control its Real Estate Holdings either directly or through the formation of a Special Purpose Vehicle (SPV). In the case of REITs, the SPV is a domestic company that holds the Real Estate Assets on behalf of the REIT, and as per regulations, the Trust holds a 50% or higher stake in the SPV.

How does a company qualify as a REIT?

To qualify as a REIT a company must:

  • Invest at least 75% of its total assets in real estate
  • Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
  • Pay at least 90% of its taxable income in the form of shareholder dividends each year
  • Be an entity that is taxable as a corporation
  • Be managed by a board of directors or trustees
  • Have a minimum of 100 shareholders
  • Have no more than 50% of its shares held by five or fewer individuals

Types of REITs to invest in

There are REITs that allow you to invest in just about any type of commercial property you can imagine. Here’s a rundown of the different specializations of REITs you could invest in:

1) Residential REITs — These are REITs that own and operate multi-family rental apartment buildings as well as manufactured housing. When looking to invest in this type of REIT, one should consider several factors before jumping in. For instance, the best apartment markets tend to be where home affordability is low relative to the rest of the country.

2) Office REITs — Office REITs invest in a wide variety of office properties, invest in office properties make the money from rental incomes. They receive rental income from tenants who have usually signed long-term leases.

3) Retail REITs — There are three main subcategories of retail REITs — malls, shopping centers, and net lease (also known as freestanding). Most retail REITs choose one of these three types, but there are a few that have a broad retail property portfolio.

4) Healthcare REITs – Invest in healthcare related sectors such as hospitals, medical offices, skilled nursing, life science, wellness centers, and more.

5) Industrial REITs — Industrial REITs own and manage industrial facilities. Rent these spaces to tenants and make the money from rental income as per the lease agreements.

6) Infrastructure REITs — These companies invest in properties like communications towers, fibre optic networks, pipelines, and other infrastructure assets that need real estate (land or buildings) to operate. For example, in order to build a communications tower, you need to own or lease the land it’s going to be installed on. In fact, the largest REIT in the world is an infrastructure REIT with communications towers located all over the world.

7) Diversified REITs — Simply put, a diversified REIT is any real estate investment trust that owns a combination of two or more of these types of properties. For example, a diversified REIT might own hotels and shopping centers.

8) Equity REIT: Equity REITs are the type of real estate investment trusts that own properties as their primary business. For example, a shopping mall REIT or a senior housing REIT would be considered an equity REIT.

REITs can be further classified based on how their shares are bought and held:

The most popular and largest REITs are generally publicly traded, but it’s important to mention that a REIT doesn’t have to be a publicly-traded company. There are actually three classifications of REITs when it comes to how they accept investments:

REITs Classification

Publicly Traded REITs: These are readily bought and sold on major stock exchanges like the NYSE and Nasdaq.

Public non listed REITs: These are available to all investors, but don’t trade on major exchanges.

Private REITs: These aren’t listed on major stock exchanges, and are generally restricted to accredited investors, which typically means high-income or high-net-worth individuals, or institutional investors.

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