Real investment trusts can own a variety of kinds of real estate. These can include shopping centers, hotels, timberlands, hospitals, warehouse, as well as offices and residential buildings like apartment complexes. Most of the time, the way REITs operate is through collecting rent by leasing space and creating dividends that are then passed along to investors, or shareholders.
REITs are run under a law that’s similar in investment structure as mutual funds for stock investment. Real estate investment trusts are very strong on generating income because they must pay out their shareholders dividends that are at least 90% of their taxable income. This is done to avoid having to pay federal income taxes.
REITs come in two forms: mortgage REITs, or mREITs, and equity REITs and are permitted to be publicly traded on stock exchanges, whether they’re private, public but unlisted, or private. Real investment trusts have their own specific asset class, as of 2014, according to the Global Industry Classification Standard.
A more detailed description of REITs is as follows:
– The majority of REITs are equity REITs, which own and invest in real estate properties that are income producing and allows investors to invest.
– Mortgage REITs own and invest in mortgage-based properties. These REITs lend money to homeowners and real estate operators for different kinds of loans for real estate through mortgage backed securities. Mortgage REITs make most of their income through their net interest margin. A net interest margin is the amount between the cost of funding the loans they give and the interest earned on mortgages.
– There are also hybrid REITs, which invest in both mortgages and properties.
In order to be classified as an REIT, a company must meet the following requirements:
– 75% of assets must be invested in cash, U.S. Treasuries or real estate
– At least 75% of gross income must come from mortgage interest, rent from real properties, or real estate sales
– A minimum of 90% of taxable income in dividends must go to shareholders ever year
– Must be taxable as cooperation
– Must have a board of trustees or directors
– Must have at least 100 shareholders
– Cannot have more than 50% of shares held by five or fewer shareholders.
History of REITs
Dwight D. Eisenhower, the 34th president of the United States, created REITs in 1960 through what is sometimes referred to as the Cigar Excise Tax Extension. The very first real investment trust was called the American Realty Trust and was founded by Thomas J. Boyhill. The Cigar Excise gives every investor the chance to invest in a high-yielding, diverse portfolio of real estate that produces income in the same way that they invest in other assets like stocks, through the use of liquid securities. Liquid securities are proofs of ownership or debts that can be used quickly to buy and sell assets because of their value.
Initially, REITs were mostly mortgage companies. Significant growth between the late 1960s and early 1970s came from REITs being more frequently used in construction and development deals. In 1975, REITs became authorized to be classified as corporations in the Tax Reform Act of 1976.
In 1992, Taubman Centers, a retail REIT, launched the UPREIT, which ushered in the modern era of REITs. An UPREIT is structured such that an operating partnership is created when a REIT and a previously existing partnership become partners. The way this works is that the REIT will have both a main and silent partners who contribute property and money, that they can have the exchange their partnership units for interest in the property, or ability to cash out gains.
REITs now have been established in more than 30 countries and have contributed to the acceptance and raised awareness of investing in global real estate. In December of 2017, there were 477 real estate companies listed on the global index, representing upwards for $2 trillion from 35 countries, 78% of that sum a result of REITs.
