REIT's 101          

A Real Estate Investment Trust, also known as a “REIT” (pronounced “reet”), is a company whose primary business is owning and managing real estate properties such as office buildings, apartment buildings, hotels,warehouses, health care facilities, shopping malls, or golf courses. Individual REITs may focus on one sector.

While many REITs invest directly in these properties, some types of REITS also can invest in real estate related loans (such as mortgages). A hybrid type of REIT can invest in a combination of real properties and mortgages.

Structurally, a REIT is set up as a company, shares of which may be purchased by investors.The management of the

REIT company uses those pooled investment dollars to buy and manage an array of properties.Collectively all shareholders indirectly own small pieces of each of the properties that the REIT owns and operates.

The goal of a REIT is to generate income from the rent paid by tenants in the buildings or leases on the properties a REIT company owns.A REIT also can generate gains when a property it owns is sold at a profit.

To qualify as a REIT company and avoid paying corporate taxes, a REIT must have at least 100 investors and agree to pass 90% of all taxable income it earns on to its shareholders each and every year. These earnings are distributed to REIT shareholders as dividends.The remaining 10% can be used by the REIT as a cash “cushion” or to pay for renovations, for example.

 REITs are governed by a board of directors and may be publicly traded on a major stock exchange in the same way shares of a corporation’s stock are traded. Just like other publicly offered companies, REITs must provide investors with prospectuses, annual reports, and other periodic updates.Private REITs (those that are not traded daily on the stock exchange) can have certain risks such as illiquidity of the investment.

REITs allow smaller investors to own large, income-producing commercial real estate.

REITs pay quarterly dividends that are often used as an additional source of income for some investors.

The taxable income that REITs earn and pass through to REIT investors are at the top of the corporate food chain.Corporations are obligated to pay operating expenses such as rent, salaries, taxes, and utilities FIRST — before paying interest payments to bondholders or dividends to stockholders. If a corporation hits a financial bump, the rent it pays to the REIT management company gets top priority.

Under current tax regulations, REITs “pass through”property depreciation to investors, which can result in significant tax savings.

REITs can further diversify an investment portfolio, which offers the potential for reduced risk and higher returns.

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