The term REIT (Real Estate Investment Trust) refers in a broad sense to a type of organization that owns or invests in real estate or financial instruments related to real estate. REITs come in several varieties, and the differences can cause some confusion. However, the basic structure and requirements are as follows:
A REIT is a pass-through company, which does not pay federal income tax at the corporate level as long as it meets the eligibility standards.
- 75% of total assets must be real estate (or related, such as real estate financing), and at least 75% of the REIT income must come from real estate and related activities.
- REITs must have at least 100 investors (following the first year of operation) and can't allow ownership to concentrate (no more than 50% can be held by five or fewer investors).
- REITs must annually (or more often) distribute at least 90% of their taxable income to investors.
Equity or Mortgage Focus
The more familiar genre of REIT invests in property. These real estate assets can be virtually any type, including multi-family housing, office buildings, industrial space, healthcare, retail, hospitality, self-storage, or another type of property. The income stream for equity REITs derives mainly from the rent paid by tenants in the owned properties.
The second type of REIT is called amortgage REIT, which buys mortgages and other financial instruments that finance commercial property. This kind of REIT generates its income mainly through interest and fees.
Some REITs, referred to as hybrids, have both property and debt in their asset base.
What About Taxes?
As noted, the corporation or other trust structure does not need to pay federal income taxes if it is eligible as a REIT. However, the individual shareholders report the income they receive and pay taxes at the ordinary income rate. As a result, some taxpayers prefer to hold REIT investments in a retirement account to defer the taxes or exempt the income from tax liability. Always consult your tax and retirement advisor about your circ*mstances.
Do REITs Have a Limited Lifespan?
Typically, REITs are traded on a stock exchange as securities, like shares in any corporation. According to the Securities and Exchange Commission, there are over 200 publicly-traded REITs in the U.S. currently. Brokers privately trade others, and some are publicly registered with the SEC but not traded. There is no set lifetime for the trust in most cases. Investors who buy publicly traded shares in a REIT can usually buy as much or little as they like and dispose of the shares when they want or need to. However, if an investor buys a non-traded or private REIT, the investment should be considered illiquid. These shares may have a minimum holding period and be more challenging to find a buyer for.
There are some limited, special use REIT examples. One is called a "finite life" REIT. This entity is formed for a specific time, generally due to the type of asset it holds or intends to purchase. When the time for disposition is at hand, the proceeds are distributed to the shareholders rather than reinvested.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. There is no guarantee you will receive any income. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
FAQs
A non-traded REIT has a limited lifespan, often seven to ten years, before ending in a liquidity event. principal as a result of the liquidity event.
Do REITs have a finite life? ›
Listed REITs are typically set up to operate indefinitely, although they can be structured with finite life.
How long do REITs last? ›
There is no set lifetime for the trust in most cases. Investors who buy publicly traded shares in a REIT can usually buy as much or little as they like and dispose of the shares when they want or need to.
What is the REIT 10 year rule? ›
The 10-Year Transition Rule: Key Requirements
This transition period can provide relief for REITs that would otherwise lose their domestically controlled status solely due to the new look-through rules for nonpublic domestic C-corporations.
What are the limitations of REITs? ›
Limitations of REITs
| Pros | Cons |
|---|
| Liquidity | Lack of tax benefits |
| Option to diversify | Market risk |
| Transparent | Low growth prospect |
| Risk-adjusted returns | High maintenance fee |
1 more row“REITs often structure buildings as separate financial entities. If they default on debt, creditors generally can foreclose on the building but have no recourse against the rest of the company … in this way, the loss incurred by the REIT is contained,” says Sharma.
What is the 90% rule for REITs? ›
“To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90% of its taxable income to shareholders annually in the form of dividends.”
What is the downside of REITs? ›
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
What I wish I knew before buying REITs? ›
Lesson #1: The Dividend Should Be An Afterthought
It may sound counter-intuitive, but lower-yielding REITs have actually been far more rewarding than higher-yielding REITs in most cases. That's because REITs are total return investments, and growth and appreciation are even more important than the dividend yield.
How long should you hold a REIT? ›
In many cases, this can take around 10 years to occur. And with publicly traded REITs that fluctuate with the stock market, Jhangiani recommends holding onto them for at least three years.
Publicly-traded REITs offer the advantage of liquidity, since individual investors can sell their shares at any time. Privately-traded REITs don't offer this liquidity, but may offer higher dividends. REIT shares are eligible for a step-up in basis upon death, just like real property investments.
What is the 75 75 90 rule for REITs? ›
Invest at least 75% of its total assets in real estate. Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate. Pay at least 90% of its taxable income in the form of shareholder dividends each year.
Can REITs lose value? ›
Well-managed REITs may contribute to a diversified portfolio and can deliver stable dividends with attractive tax benefits. However, REITs can drop in value and cause investor losses if they are not managed well.
Why are REITs struggling? ›
Here's an explanation for how we make money . More than a year of interest rate hikes by the Federal Reserve pushed down returns on real estate investment trusts, or REITs. While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard.
Is REITs good for long term? ›
REITs historically offer investors: Competitive Long-Term Performance: REITs have provided long-term total returns similar to those of other stocks. Substantial, Stable Dividend Yields: REITs' dividend yields historically have produced a steady stream of income through a variety of market conditions.
Can REITs pass losses? ›
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.
Can REITs pass through losses? ›
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.
Can you get out of a REIT? ›
Getting out of a non-traded real estate investment trust, or REIT, can often be rather difficult and expensive. Once a REIT is closed to new investors, the board of directors of the REIT can suspend the redemption policy.
Can you lose money investing in REITs? ›
Can You Lose Money on a REIT? As with any investment, there is always a risk of loss.
What is a disadvantage of REITs? ›
Lack of Liquidity: Non-traded REITs are also illiquid, which means there may not be buyers or sellers in the market available when an investor wants to transact. In many cases, non-traded REITs can't be sold for at least 10 years.
