Wednesday, January 25, 2012

Investing in REITs

A real estate investment trust, or REIT, is an investment vehicle for companies that invest in real estate. This designation allows it to reduce the level of corporate tax that it pays or perhaps even eliminate those taxes completely.

To retain their special tax status, a REIT should be able to satisfy four tests every single year:
1, A REIT should distribute 90% of its annual taxable income back to the investors in the REIT.
2. Invests at least 75% of the assets in real estate, mortgage loans or shares in other REITs.
3. At least 75% of the gross income should come from property rents, mortgage interest or property sales.
4. Ownership of the REIT consists of at least 100 shareholders and the five largest individual shareholders own less than 50%.

Passing these tests is not a guarantee that the REIT is being well-run and will make a profit, but that it meets any legal requirements for the special tax status.

Different REITs focus on different types of real estate or properties. Some might invest in residential property and other business property, or even agricultural land. Another way to define REITs depends on whether they own any real estate outright or use loans to cover the purchase costs.

Other Benefits of REITs

Aside from the obvious tax benefits, REITs offer a number of other advantages to property investors. Depending on your experience in the field, one of the best of these is professional property management. Investors that buy through a REIT can have the property managed by a professional real estate team that has first-hand knowledge of the market and deal with any issues that arise.

Personal Risk

An investor that buys real estate will often need to borrow money to fund the purchase. The investor is then personally responsible for repaying that debt that can be financially crippling if the investment does not work out. The alternative is to raise the capital from savings or cashing in investments.

Neither situation is ideal, but a REIT offers an alternative to property investment for a fraction of the amount. With careful investment, it is possible to get a similar return from a relatively small investment in a REIT as from a much larger investment on your own.

Publicly-Listed REITs

REITs can be held both publically and privately, with some public REITs listed on stock exchanges around the world. It is possible to buy shares in any of the publicly-listed REITs just like any other stock through your broker.

Over recent years, the majority of Singapore REITs have outperformed normal shares listed on the Straits Times Index. This makes them an excellent choice for an investor, who should see these stocks continuing to perform well over the next few years.

Anyone considering property investment should research using a REIT instead of taking all the risk on their own. It might not be the most suitable investment for everyone, but the special tax status and profit redistribution can make it a great place to put your money.


farmland investing said...

REITs are indeed excellent proxies for property. They generally tend to be high yielding, plus they are at least somewhat uncorrelated from the broader STI as they are influenced by different factors. The key is to find REITs where the properties they own have:

1) Close to full occupancy; and
2) No major parts of the property coming up for renewal in the near term as there is always the risk the tenant may leave and create risk to the cash-flow

Financial Freedom said...

Yes. REITs make up quite a huge chunk of my investment portfolio. Investing in REITs is mainly for the dividend / passive income though.

structured settlement cash said...

The REIT must have at least 100 shareholders and must have less than 50 percent of the outstanding shares concentrated in the hands of five or fewer shareholders.

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