REIT shares are shares of a real estate investment trust, which allows individual investors to invest in assets that would otherwise be inaccessible. To qualify as a REIT, an institution must meet certain requirements and have a portfolio with at least 75% of assets in real estate. REITs are immune from corporate taxes and must pay at least 90% of taxable income to shareholders in the form of cash dividends. REITs increase the ability of individual investors to diversify their portfolios.
REIT shares are shares of a real estate investment trust (REIT). The United States Congress created REITs, and with them REIT shares, in 1960. The real estate trust is the institution in which the shares are based, and shareholders receive dividends based on the trust’s earnings. An institution must meet several requirements to be a REIT and, in return, gains the ability to avoid corporate taxes. REITs provide individual investors with 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 have varied portfolios, but 75 percent of their assets must be in real estate. This category allows for some flexibility, as real estate assets include not only actual real estate, but also rentals and mortgages. You cannot earn more than 20 percent in dividends and interest from sources unconnected to real estate.
REITs are geared toward individual investors, so they should avoid domination of their shares by large investors. There are two tests that a REIT must meet that relate to the number of shareholders. To pass the 100 shareholder test, shares in the REIT must be held by at least 100 unique shareholders. To pass the 5/50 test, five or fewer people cannot own more than 50 percent of the shares of a REIT in the second half of the tax year. An institution can register with the Securities Exchange Commission as a REIT regardless of whether 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 confers on the company. REITs are immune from corporate taxes as long as they comply with certain regulations. The REIT can withhold only 10 percent of its taxable income to cover operating costs. You must pay at least 90 percent of your taxable income to your shareholders in the form of cash dividends. As a result, REIT stock holders can expect high dividend payments.
REITs allow people to access sectors that were previously unavailable. Investing in real estate requires a large initial investment, so the real estate market was dominated by large investors. REIT shares are instruments that divide real estate investments into shares that are available to private investors. By opening up new sectors, REIT stocks increase the ability of individual investors to diversify their portfolios.
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