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Real Estate Investment Trusts

What are Real Estate Investment Trusts?

Real estate investment trusts are known as REITs and they are entities that invest in different kinds of real estate or real estate related assets. They can be apartments, condos, homes, commercial real estate, or other types of property and they specifically invest in properties that produce income and pass on the profit to investors in the form of dividends. Successful investors can buy, sell, and trade shares of REITs just like they would sell and buy stock.  They also contain several properties ranging in size, function and activity. Just like portfolio diversification, the diversification of a REIT may provide some protection from the ups and downs of individual properties.  They also are eligible for preferential tax treatment as explained below.

To qualify for preferential tax treatment the following four conditions must be met.

1)  It must have at least 100 shareholders and must have less than 50% of the outstanding shares concentrated in the hands of five or fewer shareholders.
2)  It must have at least 75% of its assets invested in real estate, mortgage loans, in shares in other real estate investment trusts, cash, or government securities. 
3)  It must distribute at least 90% of its annual taxable income, excluding capital gains, as dividends to its shareholders.
4)  It must obtain at least 75% of its gross income from mortgage loans, rents, or return on investment from the sale of the property. A minimum of 95% must come from these sources, together with dividends, interest and gains from securities sales.

When you begin to read real estate investment trusts it is important to look for the following things:

1)  Diversification – as described briefly above, it is important to examine the annual report to make sure that it owns different types of property in various geographic areas. This concept is similar to diversifying your investment portfolio or your stock portfolio.
2)  Sustainable growth – look for annual increases in operating cash flow, listed in the prospectus as adjusted funds from operations.
3)  Experienced management – you should also check the prospectus or annual report for managers who have experience and have weathered several real estate cycles.
4)  Low debt levels – the debt should be no lower than 35% of total capitalization. Institutional investors say the lower the level of variable-rate debt of real estate investment trusts, the better.
5)  Ownership stake – get you ands on the annual report of 10K filing to determine whether management holds a sizable position in common stocks.

Many real estate investment trusts are traded on national exchanges or in the over-the-counter market.  If they are publicly traded they must file reports with the SEC, such as quarterly and annual filings. These reports can be found on the SEC’s EDGAR database. If you want to learn how to invest in real estate investment trusts, continue to utilize online resources, read a lot of books, articles, etc. Also take classes that are offered online or through your local community. Never stop learning and if you can, find an online forum that you can network with to stay on top of current trends.

 

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