Want To Know What Is A REIT! Just Read On…

REIT or Real Estate Investment Trust, like mutual funds, is a collective investment arrangement wherein funds invested by individual investors are pooled together into a trust. Unlike mutual funds (that invest in stocks), REIT’s invest in real estate. The money pooled into the trust is used for acquiring property shares.

REITs promise you higher return over investment (ROI) and they are considered better security than traditional stocks. This holds even in periods of recession – actually, fall in share prices boosts property prices and vice versa. If you are one who dreams of owning a real estate without having to take any risks, it will be ideal for you to do so through such REITs. REITs can earn you up to four times the dividend you get from an investment bond.

Now, that you know what is a REIT, be familiar with how they function. REITs usually invest in realty, which are then leased out. The earnings from these investments happen to be the income of the trust, which is then divided among the investors (the percentage of profits shared differs).

REITs invest in different types of property – right from commercial buildings like cinemas, industrial property and shopping malls to individual properties like residences as well as state-owned properties like prisons and even golf courses. Sometimes REITs also finance real estate construction work.

Being an excellent as well as safe investment instrument that brings one regular returns, the REIT’s concept is fast gaining popularity worldwide. Created by the attempts of the US Congress in 1960, REITs are now common in countries like Australia, Canada, France, Holland and Japan. In UK, the REITs are referred to as Property Investment Funds or PIFs. Many countries like Germany have their own versions of the REITs.

REITs And The US

Following a 2001 regulation, US REITs are required to disburse at least 90% of their pre tax profits among the investors. (Earlier, the qualifying dividend was 95%.) This way the REITs retain some capital for maintenance of the properties owned by them; this, at the same time, is an excellent way of dodging the double taxation disincentive (that other types of funds are forced to pay). Some US REITs even pay 100% of profits as dividends.

With an accumulated value of US$ 475 billions, there are over two hundred REITs in the USA. The shares of at least one-third of these REITs are traded in major stock exchanges but the remaining two-thirds operate on a private level.

There are three different types of REITs in the USA – Equity REITs, Mortgage REITs and Hybrid REITs. While the first of these REITs invests in the management and development of real estate properties, the second category of REIT acquire and manage real estate loans. As suggested by its name, the third type of REIT owns and manages both property and loans. About 96% of the REITs in the US are Equity REITs.

Nick Blackman