Real Estate Investment Trusts: Structure, Performance, and Investment Opportunities (2024)

FAQs

What is the structure of a Real Estate Investment Trust? ›

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool capital investors who earn dividends from real estate investments. Investors do not individually buy, manage, or finance any properties.

Why should I invest in REITs? REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks tend to be similar to those of value stocks and more than the returns of lower risk bonds.

This compares favorably to C-corps, which have a double taxation problem (profits are taxed at both the corporate and the shareholder level) The REIT structure is also favorable to partnerships, which do not pay taxes at the corporate level, but instead pass through all tax liabilities directly to the owners, who will ...

Investment trusts are companies in their own right, quoted on a Stock Exchange with independent boards of directors. They have a closed-ended structure, which means there is a fixed number of shares in issue, so for every buyer there has to be a seller. This structure can be an advantage.

Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets.

Interest rate risk. The biggest risk to REITs is when interest rates rise, which reduces demand for REITs. 6 In a rising-rate environment, investors typically opt for safer income plays, such as U.S. Treasuries. Treasuries are government-guaranteed, and most pay a fixed rate of interest.

REITs closely follow the overall real estate market and are subject to much of the same risks, including fluctuations in property value, leasing occupancy, and geographic demand. Real estate is typically very sensitive to changes in interest rates, which can affect property values and occupancy demand.

However, C-corps may offer more tax benefits in the long run. While LLCs are pass-through entities where profits and losses pass to the owners' personal returns, C-corps allow business losses to offset income earned. C-corps can also potentially qualify for more business tax deductions.

Why do investors prefer C Corps? ›

Investors prefer C corporations over S corporations and LLCs because shares in a C corp are freely transferable. By design, C corps have a well-established, standard framework for the issuance and distribution of equity (stock and stock options).

Finally, a REIT is not a pass-through entity. This means that, unlike a partnership, a REIT cannot pass any tax losses through to its investors. Consider consulting your tax adviser before investing in REITs. The Office of Investor Education and Advocacy has provided this information as a service to investors.

Investment trusts have the ability to borrow money which can be used to buy shares or other assets. This is often referred to as 'gearing', and can enhance returns in a rising market, but detract from returns when a market falls.

Like all funds, investment trusts can rise and fall in value. However, they have more factors affecting their performance (such as supply and demand), which can mean they are more volatile and, therefore, a more risky investment.

Investment companies are known as closed-ended, as opposed to unit trusts which are open-ended. What's meant by investment companies being closed-ended is that they have a fixed number of shares in issue at any one time. You invest in an investment company by buying the shares from another investor on the stock market.

How must a real estate company be organized to qualify as a REIT? A U.S. REIT must be formed in one of the 50 states or the District of Columbia as an entity taxable for federal purposes as a corporation. It must be governed by directors or trustees and its shares must be transferable.

Diversification: A well-structured real estate portfolio includes a mix of property types and locations to spread risk and enhance overall stability. Diversification can involve investing in different asset classes, such as residential homes, apartment buildings, office spaces, retail properties, or even vacant land.

The two main types of REITs are equity REITs and mortgage REITs, commonly known as mREITs. Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term. mREITs invest in mortgages or mortgage securities tied to commercial and/or residential properties.

Rental income is the most common source of revenue for REITs, and it comes from tenant rents. Property appreciation is the increase in the value of real estate over time, and it can also be a source of income for REITs if they sell properties for more than they paid for them.