Real Estate Investment Trusts {REIT's}
REITs:
1. Make loans secured by real property. 2. Are owned by stockholders and enjoy certain federal income advantages. 3. Allow small investors to pool their money to participate in larger real estate transactions and help make financing available for large real estate developments such as apartment complexes, shopping malls, and office buildings.
REITs were first created in
1967 to take advantage of changes to tax laws that prevented double taxation on trust income. Tax laws allow trusts to earn income from real estate investments without having to pay trust income tax. To avoid the trust income tax, the trust must distribute 95 percent of the ordinarily taxable income to the trust beneficiaries, then the beneficiaries report the income for tax purposes.
Equity REITs,
Do purchase properties. They make money primarily from their properties' rents. Usually when someone talks about a REIT, they are talking about an equity REIT. Equity REITs tend to specialize in owning certain building types (such as apartments, regional malls, self-storage, office buildings or hotels). Here is an excerpt from a web page advertising an equity REIT: One Liberty Properties, Inc. is a self-administered and self-managed real estate investment trust incorporated under the laws of Maryland in December 1982. One Liberty is publicly traded on the New York Stock Exchange under symbol "OLP". The primary business of the Company is to acquire, own and manage a geographically diversified portfolio of retail, industrial, properties under long term leases. Substantially all of our leases are net leases, under which the tenant is responsible for real estate taxes, insurance and ordinary maintenance and repairs.
Mortgage REITs
Don't buy properties. They invest in real-estate debt. Some used to make loans but now most primarily buy commercial and residential mortgage-backed securities. Many focus on buying mortgage securities backed by Freddie Mac and Fannie Mae. Mortgage REITs make money by incurring short-term debt to acquire longer-term mortgage securities, earning the spread between the two rates. During periods when the Fed keeps short-term interest rates low (to stimulate the economy), mortgage REITs are popular investments because they reduce the REIT's borrowing costs. Here is an excerpt from a web page advertising a mortgage REIT: Capstead Mortgage Corporation operates as a real estate investment trust earning income from managing a leveraged portfolio of residential adjustable-rate mortgage ("ARM") securities issued and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Agency-guaranteed residential mortgage securities are considered to have little, if any, credit risk.
The two major investment choices for REITs are:
Mortgage REITs and Equity REITs
Mortgage and equity REITs are registered with the
Securities and Exchange Commission (SEC), regardless of whether they are public and therefore listed on major stock exchanges or non-listed.
Difference between public and non-listed REITs
The non-listed REITs are sold by brokerage firms directly to investors and are not traded on any exchange. [Source: REIT Basics at https://www.reit.com/investing/reitbasics/guide-equity-reits]
Real estate investment trusts (REITs)
are companies that own, and usually operate income producing real estate. REITS generally own many types of commercial real estate, including multifamily, warehouses, and retail.
