RealEstate Investment Trusts

Real Estate Investment Trusts ( REITs) are a boon for small investors who do not have the ability or the intention to directly own real estates. Created in 1960 by the US Congress, the REITs are companies that allow investors to buy and sell stocks exactly like listed companies. REITs own and operate buildings, apartments, shopping malls, hospitals, hotels etc. While companies share profits with the shareholders by paying dividends, its mandatory for REITs to distribute at least 90% of their taxable income annually to their shareholders, failing which they risk being disqualified to operate.

Real Estate Investment Trusts are different from real estate companies in that they acquire and develop property to operate them and not sell them after development of property. A REIT is more trust worthy from an investor’s perspective, as their interests are common – earning and sharing profit. Where as a real estate company is concerned only with it’s own interest and cares only about making profit, irrespective of loss or profit incurred by the investor.

There are three types of REITs: Equity, Mortgage and Hybrid. Equity REITs acquire, develop and operate real property that include leasing and tenant servicing. Mortgage REITS lend money to owners and developers or invest in financial instruments secured by mortgages on existing properties. The hybrid REITs deal in the combined activities of the equity and mortgage REITs. There are 180 registered (with Securities and Exchange Commission) and 800 unregistered REITs in USA. The combined assets of these registered REITs stands at in excess of $400 billion.

The composition of a REIT is much like a company and taxable like a corporation. Apart from other stipulations, it must have 100 shareholders minimum, and not more than 50% of its shares can be held by 5 or fewer individuals. The affairs of REITs are managed by its board of directors and professional appointed by them, who are answerable to the shareholders as well as creditors.

Investing in REITs offers numerous benefits: a wide range of portfolio, stable returns, higher dividend yields, greater liquidity and transparency in case of listed REITs. A stockbroker can help in buying REIT stocks or buying the shares of mutual funds that are investing in REITs. Before investing, its advisable to look for the track record of the REIT in completing projects, the competencies of the board of directors and the professionals managing the company and the proven ability of the REIT to make profits