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Are you all REIT?

Invest in real estate without owning any

With national rent and home prices hitting all-time highs, it could be a tough sell to find real estate you can afford and even harder to snap it up before someone beats you to it.

Instead of buying physical real estate, and dealing with all the brick and mortar headaches, you could invest in REITs, real estate investment trusts, or companies that own and operate income-producing apartment buildings, malls, warehouses, hospitals, hotels and storage units. 

According to Nareit, the National Association of Real Estate Investment Trusts, REITs collectively own more than $3.5 trillion in gross assets across the U.S., representing more than 500,000 properties and have an equity market capitalization of more than $1.35 trillion. 

How it works

REITs were created by Congress in 1960 to provide a real estate investment structure similar to mutual funds so investors can buy affordable equity stakes in real estate companies without having to own any pricey properties themselves.

REITs are required by law to pay out at least 90 percent of their taxable income to shareholders. That income is generated by rents and lease payments from real estate holdings. It’s because of this tax structure that many investors look to REITs for big payouts. REITs also can buy and finance real estate more competitively because they don’t pay corporate-level taxes. 

To qualify as a REIT, a company must invest at least 75 percent of its total assets in real estate, and earn at least 75 percent of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate. They are managed by a board of directors or trustees, have a minimum of 100 shareholders and have no more than 50 percent of their shares held by five or fewer individuals.

Nariet found 145 million Americans own REITs through their retirement savings and investment funds.

Appraising the options 

Equity REITs are companies that act like landlords. They own income-producing real estate, manage it and collect rent.

Mortgage REITs (mREITS) don’t own property, but they buy mortgages and collect monthly payments and earn income from interest. Hybrid REITs are a combination, plus they also own and operate commercial real estate ventures and mortgages.

REITs can be publicly traded like stocks; public, non-listed REITs (PNLRs) are registered with the SEC but do not trade on national stock exchanges; and private REITs are exempt from SEC registration and their shares do not trade on national stock exchanges.

ROI

While REITs have been shown to outperform the stock exchange and private real estate investments with consistent dividends, boast ease of purchase and transfer and display less volatile behavior, REITs do incur a lot of debt. And since they also distribute a large amount of their profits, they may be slow to grow. For the buyer, investors have to pay taxes on REIT dividends if not held in an IRA, and sometimes buying into a REIT, especially a non-traded one, can be expensive and limited.

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