Real Estate Investment Trusts

A real estate investment trust or REIT can be an intriguing way to participate in property investment, particularly for the investor who dislikes putting all his/her eggs in one basket, so to speak.

Basically, REITs are real estate investment firms that operate groups of income-producing properties. A real estate investment trust is structured by law to distribute a minimum of ninety percent of the company’s taxable profit to the REIT shareholders.

Due to the fact that a REIT distributes nearly all of its profits to company shareholders, the investment trust automatically exempts itself from being subject to a corporate income tax.

The REIT profit distribution structure differs from a standard corporation which pays a corporate tax on profits, and distributes after tax profits divided between dividends and reinvestment. By distributing most profits to shareholders while retaining a minimum profit share the REIT is legally exempt from this tax.

REITs common shares are offered to the public just the same as any operating company would offer shares to stockholders who have faith in the company’s long-term future and profit potential.

Most REITs (known as “equity” REITs) focus on the buying and selling of real estate properties, which can be any kind of real estate, ranging from apartment buildings, regional malls and hotels, to golf courses. Some REITs may specialize only in specific types of real estate holdings, such as apartment complexes.

A small percentage of REITs known as “Mortgage REITs” specialize in mortgage loans, and do not operate or own investment properties. Another small percentage of REITs operate in all sectors of real estate; mortgage loans, and property ownership and management.

Certainly, investing in a REIT carries no guarantee of big profits, and depending on how the economy is affecting real estate, possibly no profit at all or even a loss. Over the long term, however, average returns to stockholders from REITs dividends have ranged from satisfactory to excellent but like any other stock, any REIT considered as an investment should be thoroughly analyzed before making a commitment.

Another option for those considering investing in REITs are the so-called “private REITs”. Private REITs, as opposed to publicly traded REITs, are usually less diversified. Some private REITs have been known to pay higher dividends than publicly traded real estate investment firms, but this is not often the case.

Overall, investing in a REIT, like any other investment, should be carefully and cautiously considered, especially during these uncertain economic times, and the uncertainties that are currently affecting real estate as a whole.

About the author

Tony Sena Broker/Owner of Shelter Realty, Inc.

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