There are quite a few things you should know before investing in your first retail REIT.

Retail is one of the more interesting real estate investment trust (REIT) specializations. Retail tenants lease several types of commercial properties, and each type has its own risk factors and business dynamics, so it’s important to know what you’re getting into before you buy your first retail REIT.

Here’s what you need to know.

What is a retail REIT?

A real estate investment trust, or REIT, is a special type of company whose primary business is investing in real estate assets.

The company needs to meet some specific requirements to qualify as a REIT. It must

  • invest a minimum of three-fourths of its assets in real estate,
  • derive three-fourths of its income from rental income or other real estate-related income streams,
  • have a minimum of 100 shareholders,
  • be no more than 50% owned by five or fewer investors, and
  • pay out at least 90% of its taxable income to shareholders as dividends.

If a company meets the REIT requirements, it enjoys a nice tax benefit. Any profits earned by a REIT are not subject to corporate income tax. Instead, REITs pay out most of their taxable income directly to investors.

REIT dividends are subject to income tax unless they’re held in a retirement account. But not paying corporate income tax is still a huge benefit. Most companies are taxed at the corporate level and the money they pay out as dividends is also taxable on the individual level. Their profits basically get taxed twice.

Most REITs specialize in one type of commercial real estate. Retail REITs invest in properties primarily occupied by retail tenants. Most retail REITs specialize even further in a specific type of retail property.

For example, some retail REITs own shopping malls while others own outlet centers. Some own open-air shopping centers and others own single-tenant, freestanding properties.

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