Investing in REITs

Before going into further discussions about investing in REITs, it's better to first try to understand what REITs mean.

What then does REITs mean?

REITs mean real estate investment trusts. These are companies that own, and in most cases, operate income-producing real estate. Some REITS however serve to finance real estate.

What does it take to reach an REIT status?

1. To be an REIT, 90% of the company’s taxable income must be distributed to shareholders through dividend annually, excluding capital gains.

2. At least 75% of its assets must be invested in mortgage loans, shares in other REITs, government securities, cash, and real estate.

3. At least 75% of its gross income must be derived from mortgage interests, rents, or gains from selling real property. At least 95% must also come from these sources, along with interests, gains, and dividends from sale of securities.

4. To be an REIT, a company must have at least 100% shareholders and less than 50% of the outstanding shares concentrated in five or lesser shareholders.

What are some of the other benefits that REITs offer?

Aside from prevention of double-taxation, REITs offer other benefits including:

Professional management More often when an investor acquires a real property, it is left to her or him to devise plans. REITs however allow the management of properties of investors by professional real estate teams with a deep understanding of the industry and familiarity with the business. The real estate team is then able to grab the opportunity to raise funds from capital markets.

Personal risk limitation Personal risks can be significantly limited with REITs. Buying an REIT can be done in a few hundred dollars as share prices often get as low as or lower than equities.