Your Complete Guide To Investing in Real Estate Investment Trusts (REITs)
Real estate investment trusts, or REITs, can be fantastic ways to add both growth and income to your overall portfolio, while adding diversification at the same time. Before you get started, however, it’s important to know that REITs aren’t the same as most other dividend stocks, and it’s important to familiarize yourself with the basics.
What is a REIT?
A REIT (pronounced reet) or Real Estate Investment Trust, is a unique type of company that allows investors to pool their money to invest in real estate assets. Some REITs simply buy properties and rent them to tenants, others develop properties from the ground up, and some don’t even own properties at all, choosing to focus on the mortgage and financial side of real estate.
Although this is an oversimplification, you can think of real estate investment trusts like a mutual fund for real estate. Hundreds or thousands of investors buy shares and contribute money to a pool, and professional managers decide how to invest it.
The purpose of REITs is to allow everyday investors to be able to invest in real estate assets that they otherwise wouldn’t be able to. For example, could you go out and buy a high-rise office tower or shopping mall? Could you buy a portfolio of mortgages, or would you even know how to go about doing this? Probably not. However, a REITs allow you to put your money to work in these ways. You can even gain exposure to billion-dollar commercial property portfolios with just a few hundred dollars to start.
How does a company become a REIT?
It’s important to realize that a company can’t simply buy some real estate and call itself a real estate investment trust.
There are some specific requirements that must be met, including:
- REITs must invest at least three-fourths of their assets in real estate or related assets, and must derive three-fourths of their income (or more) from these assets. In other words, more than 75% of a REIT’s income needs to be from sources like rental income, mortgage payments, third-party management fees, or other real estate-derived sources.
- REITs must be structured as corporations, and must have at least 100 shareholders. Because of the 100-shareholder requirement, many REITs start out as real estate partnerships, and convert to REIT status later on.
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