An Indepth Look at The REIT: Real Estate Investment Trust

Written by Posted On Thursday, 28 March 2019 13:58

2018 was a great year for the real estate market. Low inventories and attractive mortgage rates helped many inland areas of the country see property values rise anywhere from 20 to 34 percent.

Investing in real estate can be an attractive option if you are looking to diversify your portfolio.

“REITs offer opportunities for individuals looking to invest in real estate, searching for yield investments, or focused on total returns.  Many retirement savers and retirees have favored REITs given the current income generated by the dividend yield and the solid historical total returns,” says Timothy Reilly, of Hilton Capital Management. Hilton Capital Management is an investment firm that manages over 1.6 billion in handles over 1.6 billion in balanced and equity strategies.

He continued, “The concept of a REIT is modeled after that of a mutual fund—allowing all investors a chance invest in portfolios of real estate through an accessible vehicle.  REITs must pay out at least 90 percent of their taxable income to shareholders, which usually results in relatively high dividend yields.”

What Is A Reit?

The U.S. Congress established REITs in 1960 when an amendment was added to the Cigar Excise Tax Extension. This amendment allowed investors to purchase shares in an income-producing commercial real estate business whose portfolio contains one of a wide range of property types including retail centers, apartment complexes, healthcare facilities, data centers, and warehouses.

REITs fall into five general categories, which are:

  • Retail – shopping centers and freestanding stores

  • Residential – apartment complexes and manufactured housing communities

  • Healthcare – hospitals, urgent care centers, nursing homes, and retirement homes

  • Office – business and government agencies

  • Mortgage – companies purchase mortgages on the secondary market

 

Most REITs specialize in one type of property. A diversified REIT may have two or more types of properties in its portfolio such as retail and office properties or mortgages and residential properties.

The Internal Revenue Code has certain provisions that a real estate company must follow to qualify as a REIT.

Some of the provisions include:

 

  • A board of directors or trustees must manage the REIT

  • The REIT must be taxed as a corporation

  • A minimum of 75 percent of the REITs assets must be in real estate, cash, or U.S. Treasuries

  • A minimum of 90 percent of the REITs taxable income must be distributed to shareholders as dividends

Who Should Participate:?

Investing in REITs is a good way for you to get involved in real estate investing if you do not have the money or inclination to invest in real estate on your own. They’re also a good way to diverse your portfolio, as they tend to be less correlated to the overall equity market.

Why Are Reits A Good Personal Finance Option?

Reits provide a reliable stream of passive income. According to the National Association of REITs, there are 226 REITs that pay an average dividend yield of 4.3 percent. There are many REITs that pay a dividend yield that is two to three times higher than the average.

REITs paid out $58 billion in dividends in 2017.

Over the last 25 years, the NAREIT All Equity REIT Index outperformed the S&P 500 Index in 16 of those years with an annualized return of 9.9 percent during this time period.

Just like any other investment vehicle, it’s important to determine your overall strategy and conduct due-diligence before making investment decisions.


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James Stevenson

Hi, My name is James and I've been involved in the property and real estate industry for 10 years now. I hope people will like to read about my thoughts and experiences in the industry and please contact me if you want to discuss my articles further!

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