'Real Estate Investment Trusts (REIT)' is explained in detail and with examples in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Real Estate Investment Trusts are also known as REITs. These turn out to be investment companies which finance or outright own real estate that produces income. REITs were created along the model of mutual funds. They give all levels of investors the access to the benefits that real estate typically provides.
This includes diversification, income streams, and capital appreciation longer term. Usually these REITs pay their investors 100% of their taxable income in the form of dividends. The shareholders are responsible for paying taxes on the dividends as income tax.
The beauty of Real Estate Investment Trusts lies in the ability for any investor to participate in major properties. They are able to do this by buying shares of stock to become involved as they would with any other industry Just as a shareholder obtains benefits through stock ownership in companies, the stock holders in a REIT gain a percentage of the income that the underlying real estate produces. They do not have to locate, purchase, or finance any of the properties in the process.
The majority of Real Estate Investment Trusts trade on the bigger stock exchanges. Despite this, some of them are privately held or public companies that are not exchange listed. With these REITs there are two principle types, Mortgage and Equity REITs.
The mortgage REITs buy mortgage instruments or outright mortgages that are connected to residential or commercial properties. The Equity REITs produce their income by collecting rent from and selling properties they hold over longer time frames.
Real Estate Investment Trusts have expanded into practically every part of the economy today. There are REITs connected to timberlands, student housing, storage centers, shopping malls, company offices, nursing homes, infrastructure projects, industrial facilities, hotels and resorts, hospitals, and apartments. Every state in the United States has properties which are owned by REITs. Ernest and Young has funded a study that shows REITs provide for around 1.8 million jobs in the United States every year.
These American REITs have become so successful that they are now a model for other countries. Over 30 nations throughout the globe have approved legislation that allows the Real Estate Investment Trust.
Real Estate Investment Trusts offer diversification that does not correspond to the overall stock market and its performance measured longer term. Their dividends give investors a reliable stream of income. They are so liquid because these stock exchange based ones may be simply and quickly purchased and sold.
Their performance is standout. REITs which are publically listed and traded have outperformed the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite when measured over the longer term. Like publically traded companies, they offer the transparency and oversight of quarterly financial reporting and commonplace regulatory standards.
There are many qualifications a company must meet to be considered a Real Estate Investment Trust. They have to place minimally 75% of all assets they possess into real estate. They also must obtain 75% or more of their gross income from sales of real estate, rents on property, or interest on mortgage holdings that finance property. These companies have to pay out a minimum of 90 % of their taxable income as dividends to shareholders every year.
The prospective REIT must have the status of corporation that is taxable. It must also have either trustees or a board of directors that manage it. They can not have over 50% of their entity shares owned by less than six individuals. The REITs also must possess at least 100 different shareholders.