Real Estate Investment Trusts (REITs)

real estate investment trust

Real Estate Investment Trusts (REITs) originated in the 1880s at a time when investors could avoid double taxation, or a tax at corporate and individual level.

In the 1930s, this tax benefit was removed, causing investors to pay “double tax.”

U.S. President Eisenhower signed the REIT tax provision in 1960.

A Real Estate Investment Trust or REIT is a tax designation for a corporate entity investing in real estate.

The purpose of this designation is to reduce or eliminate corporate tax.

In return, REITs are required to distribute 90% of their taxable income into the hands of investors.

The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.

REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges.

REITs can be classified as equity, mortgage, or a hybrid.

The key statistics to examine in a REIT are net asset value (NAV), funds from operations (FFO), adjusted funds from operations (AFFO) and cash available for distribution (CAD).

Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate.

An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs).

Among other things, Real Estate Investment Trusts invest in shopping malls, office buildings, apartments, warehouses, hotels and etc.

Some REITs will invest specifically in one area of real estate – shopping malls, for example – or in one specific region, state or country.

Investing in REITs is a liquid, dividend-paying means of participating in the real estate market.