REITs are real estate investment trusts that allow individual investors to invest in real estate assets. To qualify, an institution must have 75% of its assets in real estate and meet shareholder tests. REITs are tax-exempt and pay high dividends, making them attractive to investors. They also increase the ability of individual investors to diversify their portfolios.
REIT shares are shares in a real estate investment trust (REIT). The US Congress created REITs, and with them REIT stock, in 1960. The real estate trust is the underlying institution of the stock, and shareholders receive dividends based on the fund’s profits. An institution has to meet several requirements to be a REIT and in return gets the ability to avoid corporate taxes. REITs offer individual investors the opportunity to invest in assets that would otherwise be inaccessible.
To qualify as a REIT, an institution must have an adequate portfolio of assets. REITs are real estate institutions. They may hold several portfolios, but 75% of their assets must be in real estate. This category allows for some flexibility, as real estate assets include not only actual real estate holdings, but also rentals and mortgages. It cannot earn more than 20% in dividends and interest from sources that have no connection to real estate.
REITs are geared towards individual investors, so they must avoid domination of its stock by large investors. There are two tests that a REIT must meet and they relate to the number of shareholders. To pass the 100 shareholder test, the REIT’s shares must be held by at least 100 unique shareholders. To pass the 5/50 test, five or fewer people cannot own more than 50% of the shares of a REIT in the second half of the fiscal year. An institution can register with the Securities Exchange Commission as a REIT whether or not it is publicly traded, but it must pass both shareholder tests.
One reason a real estate company might choose to register as a REIT is the tax status that registration gives the company. REITs are immune to corporate taxes as long as they comply with certain regulations. The REIT can only withhold 10% of taxable income to cover operating costs. It must pay at least 90 percent of its taxable income to its shareholders in the form of cash dividends. As a result, REIT stockholders can expect high dividend payments.
REITs allow people to enter industries that were previously unavailable. Investing in real estate requires a large initial investment, so the real estate market used to be dominated by large investors. REIT shares are instruments that divide real estate investments into shares within the reach of private investors. By opening up new industries, REIT shares increase the ability of individual investors to diversify their portfolios.
Smart Asset.
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