REITs 101: What is a REIT?

Modeled after mutual funds or unit trusts, they pool together funds by initially issuing shares (or units) in the REITs to investors. These shares are individual units of ownership and represent an entitlement to the benefits in the REIT; for example, rights to the distribution of income and the rights to the distribution of income and the rights to the vote on policies. These pooled funds are directly used to invest in real estate or real estate backed assets with the objective of profiting both from the recurrent income and capital appreciation.

Income derived from the REIT's investments are redistributed back to investors in proportion to their investment amount. The more shares (or units) they own, the larger their fractional entitlement in the REIT. In this way, REITs make it easier for investors to gain exposure to the long-term capital appreciation of the real estate sector while enjoying regular income through the distribution of dividends.

To qualify as a REIT, the entity needs to fulfill several conditions, including (but not limited to):
● Primarily own or invest in real estate or real estate backed assets with a long-term horizon
● The majority of its income must be derived from real estate or real estate backed assets
● Restricted from owning vacant land
● Restricted from undertaking large scale real estate development activities
● Widely held by a large number of shareholders
● Structured as a trust (more on that in the next section)
● Adhere to any tax code or rules that govern their minimum dividend payouts

In most jurisdictions, tax transparency laws dictated that a REIT must pay at least 90% of their taxable income to shareholders in order to qualify and maintain their status as a pass-through entity and therefore be exempted from paying business tax. In this way, REITs allow investors to avoid double taxation, i.e., paying taxes both at the corporate and individual levels.

In summary, REIT investors enjoy all the benefits of owning a tax efficient real estate asset with low capital outlay without having to go out and source, buy, manage or finance the property themselves.

This dramatically reduces the barriers to real estate investing and enables investors to rapidly build up a valuable real estate portfolio.

Quick Test
After the above introduction, you should have some basic understanding of REITs. Let's have a quick test. Mooers who get it right will get 50 points.
Hint: You can find the answer in this post!

The answer and winners will be revealed in the next post. Winners will get 50 points, with which you can exchange gifts at Reward Club.

Thank you for reading and particiapting

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