How does real estate investment trusts work?

2 Comments

1. cullar says:

   June 17, 2010 at 2:27 pm

   A REIT buy’s skyscrapers, shopping malls, apartment complexes, office buildings, or housing developments. Rather than investing directly in real estate, investors of REIT’s invest in a professionally managed portfolio of real estate.

   REIT’s trade on the major exchanges, just like stocks. REIT’s make their money from the rental income, profits from the sale of the property and other services provided to the tenants. REIT’s also receive special tax considerations; they do not pay taxes as long as they pay out at least 90% of their net income to investors. Thus, successful REIT’s can offer investors high yields, current income, and moderate growth. But, while these tax considerations benefit the REIT, the investor still has to pay tax on the growth just like a share of stock.

   There are several types of REIT’s:

   There is a equity REIT. It’s main objective is buying, renovating, managing, maintaining, and selling real estate. This is the most common type.
   There is the mortgage REIT. It makes loans or invests in existing mortgages.
   Hybrid REIT’s do a combination of both.
   Then there are UPREIT’s and DownREIT. These were developed in the early 90′s to provide tax benefits to their shareholders.

   Advantages:

   All REIT’s are governed by strict regulation. REIT shares are more liquid than investing directly in real estate. The REIT’s are professionally managed. Open up investment opportunities that may not be available to the average investor. Provide annual income. Disadvantages:
   Supply and demand imbalance. Booms and busts can impact office space activity. Rising interest rates. This increases borrowing costs and impact bottom line. This could also slow down rentals and purchases if interest rates increase. Subject to risks associated with the general real estate market including possible declines in the value of real estate, decline in economic conditions, and possible lack of availability of mortgage funds. Use as a tax shelter is limited. REIT’s are not allowed to pass losses through to their investors. So, if the REIT loses money, you won’t be able to use the loss to offset other investment gains. Dividends paid from a REIT are taxable as income. A portion of a REIT dividend may be taxed an a lower capital gain rate. For tax years beginning on or after January 1, 2003 and before January 1, 2011, qualifying dividends paid to individual shareholders from domestic corporations (and qualified foreign corporations) are taxed at long-term capital gains tax rates. For tax years prior to January 1, 2003, however, stock dividends were taxed at ordinary income tax rates, generally resulting in significantly more tax due. Absent further legislative action, stock dividends will again be taxed as ordinary income beginning in 2011.
   Capital gain tax liability may occur when you sell your shares. If you sell the share for more than you bought it for. Just like stock.
   When looking to invest in a REIT, you can do the same research as you would have done in researching a share of stock. Because they are publicly traded companies you can look at their earnings, both past performance and potential for future growth, dividend yield, payout ratio, and price-earnings ratio. By keeping an eye on the real estate market you may be able to detect certain shifts in the market, overbuilding, current buildings where office space is sitting empty, or where certain types of business are closing because of economic situations. This way you can more to another type of REIT that may work better in a certain kind of market.

   You can go the Forbes magazine REIT gold list to see different REIT companies, what they are invested in, and what the performance is. http://www.forbes.com/2008/02/20/reit-perfomance-grades-biz-cx_dp_0220reit_table.html
2. catholic says:

   June 17, 2010 at 2:27 pm

   The starting investors pool their money, purchase realestate (usually leveraged by loans), the income dirived from the property is divided amoung the shareholders after the expenses of the management company are paid. After a period of time, the trust lists its shares on a stock exchange and they are then traded just like stocks. Usually, the Starting Investors will get their shares at a discount (will get a higher rate of return), and thus they have built in an incentive to get in early and wait through the starting period when their shares are not liquid (can not be sold easily).

   There are special tax laws on REITs. The income of the company is not taxed until it is distributed to the owners. If you list your shares to pay dividends as shares, you do not have to pay any tax until they are either sold or you begin to tap the dividend stream.

   These funds are started by real estate companies in order to have a series of building they are contracted to searve (collect rents, maintain, evict dead beats, so on). They make money on the monthly fees charged per apartment, and they make money on the sale of shares to originating investors and when the stock goes public.

   Most that are available in the open market are paying between 5% and 7.5% (as the income increases because of rent increases and increased value of the apartment, the price of the shares rise to maintain that 5% to 7.5% rate). many original investors earn about 7% at the start of the investment and by the time it is public, they are earning 9% to 11% on their original investment. The investment is illiquid for the first few years (3 to 5 years).

   They are generally good, safe long term investments. The return is based on income rates based on rents. It is an easy way to own real estate. REITs based on Apartments are doing well now (all those people who lost a house due to forclosure have to live somewhere). Doctors’ offices are also pretty safe. Doctors tend to go 20 to 30 years without moving their practice and they pay their rent very regularly and relyably. Office buildings are more sensitive to recession as are retail buildings. They also tend to have higher returns when they are fully rented.

   I’ve been in several REITs, and have been satisfied with the return. One I was an Original Investor. I bought in just before they closed the Original investment phase. It went bust right after they formed (they were not able to raise enough money to buy enough buildings to get the economies of scale they needed to make this a going REIT. Because the real estate appreciated from the time it was bought to the time the REIT went down, I was able to make a 33% return in about 9 months. In addition, I had 9 months income at 6%. I was pretty happy.