Real Estate Investment Trusts (REITs)
Investing in real estate can provide diversity to a portfolio, regular income, and capital appreciation over time. However, real estate can be an expensive investment, and liquidity can be limited due to fluctuating market conditions. Real estate investment trusts offer investors the opportunity to invest small amounts in real estate and do it with liquidity
A real estate investment trust (REIT) is a type of trust that is modeled on a mutual fund. The managers of a REIT buy, develop, manage, and sell a portfolio of income-producing properties. Because a REIT is a trust, it sells shares of beneficial interest. The holder of these shares receives benefits from the assets held by the trust—in this case, real estate—but does not own the actual assets. By owning a REIT, investors can take part in real estate’s potential benefits, including price appreciation and income, without the burden of owning and managing property.
REITs are not investment companies. But REITs are a packaged security, and for that reason, they are included in this chapter.
REIT shareholders receive dividends from investment income (primarily rent). They also receive capital gains distributions when properties are sold. REITs do not pass through losses to shareholders, unlike a real estate limited partnership (RELP) or a real estate direct participation program (DPP). Another difference between REITs and real estate DPPs is that REITs acquire and develop properties mostly to keep in their portfolios, rather than to resell after development.
To qualify with the IRS, a REIT must meet the following requirements:
- • Annually, at least 75% of the REIT’s gross income must be real estate-related income (for example, rents).
- • Annually, at least 95% of the REIT’s gross income must come from real estate–related income or dividends and income from other sources (e.g., stock market investments).
- • At least