Weekly Investment Feature: Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts are formed when investors’ money is used by a corporation to purchase income properties and operate them. Like other kinds of stocks, REITs are bought and sold on exchanges. Due to this exchange trade, REITs remain highly liquid and will not require a real estate agent or title transfer to receive profits. REITs avoid paying corporate income tax on the basis that corporations are required to payout 90% of taxable profits as dividends in order to maintain their status as a REIT. REITs make non-residential real estate investments more accessible for those who cannot directly purchase non-residential real estate otherwise. REITs can be either an equity investment trust, which will own buildings, and a mortgage REIT that finance real estate and invest in mortgage backed securities. They are both a good way to get exposure to real estate, however an equity REIT is more traditional because it represents real estate ownership while a mortgage REIT will focus on the income that comes from the mortgage financing associated with real estate.
While an REIT is essentially a formal version of a REIG (real estate investment group), there are some different pros to investing money into this kind of investment trust:
Core holdings are usually long term and cash producing
Avoids high corporate income tax rates
REITs are highly liquid and make it easy to navigate profits
The pros to investing in a real estate investment trust are attractive, but there are also a few cons to keep in mind:
No leverage in an REIT as opposed to rental real estate
Less close connection with real estate and experience, highly focused on profit
REITs are a great real estate investment option for those not able to purchase outright or looking to focus mainly on profit.
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