The Basics of REITs
I recently heard some very favorable comments concerning REITs as an investment and feel that we should review the most important facts to be aware of concerning this type of investment.
First and foremost, a REIT is a stock, pure and simple. REITs trade on stock exchanges just like all stocks. However, they differ in that they own virtually nothing but real estate. They also differ in how they are taxed.
For most corporations, every dollar of net earnings is taxed 34 cents, leaving 66 cents of potential dividends for the shareholders. One advantage of REITs is that they are given a pass on the corporate tax if they meet certain guidelines on the percentage of company assets made up of real estate, and the percentage of total income that is paid as dividends to the shareholders.
The net result of all this is that REITs pay lots and lots of cash relative to their typical stock cousin. And because they own real estate they have tenants. And because they have tenants, they raise the rents of said tenants and they then raise their dividends to the owners. This is a remarkably simple "food chain" - with the REIT holder on top!
Now REITs come in six main classifications. The broadest are equity REITs, where the company buys, manages, and eventually re-sells actual property. The second major type is a mortgage REIT, where the company is a glorified bank. As a rule of thumb, the equity REIT will provide you with more future growth and some income, while the mortgage REIT will provide you with more current income and some growth.
The next two classifications you need to know are geographic and industrial. Both of these are pretty much self-explanatory; you can get a California REIT, or a Florida REIT, a Southwestern U.S. or even a Washington, D.C. REIT. Industry classifications will fall into office building REITs, mall REITs, hotel REITs and even nursing home REITs. Geographic REITs and industrial REITs also can be equity or mortgage combos.
The last two classifications aren't really as much classifications as they are "packaging." A hybrid REIT invests in two or more classifications - typically part equity and part mortgage. A PREIT (a finite REIT) is simply a REIT that has a predetermined ending date. It could be five, ten, or twenty years. Like all the others, they too can be equity, income, geographic, or whatever.
Now before you run off to buy 100 shares of XYZ REIT, you need to consider the risks. First of all, stocks will be stocks. They go up and down. And occasionally out. So always stick with class when it comes to REITs.
Next, REITs, like real estate in general, are long-term investments. Speculators are not welcome.
Third and last of all, if you are thinking of investing in REITs, do your homework. Visit the library. Call your broker. Get some annual reports and most important, diversify. Spread your eggs around. Start with a couple of REITs, and add to them regularly.
* * * * *
First and foremost, a REIT is a stock, pure and simple. REITs trade on stock exchanges just like all stocks. However, they differ in that they own virtually nothing but real estate. They also differ in how they are taxed.
For most corporations, every dollar of net earnings is taxed 34 cents, leaving 66 cents of potential dividends for the shareholders. One advantage of REITs is that they are given a pass on the corporate tax if they meet certain guidelines on the percentage of company assets made up of real estate, and the percentage of total income that is paid as dividends to the shareholders.
The net result of all this is that REITs pay lots and lots of cash relative to their typical stock cousin. And because they own real estate they have tenants. And because they have tenants, they raise the rents of said tenants and they then raise their dividends to the owners. This is a remarkably simple "food chain" - with the REIT holder on top!
Now REITs come in six main classifications. The broadest are equity REITs, where the company buys, manages, and eventually re-sells actual property. The second major type is a mortgage REIT, where the company is a glorified bank. As a rule of thumb, the equity REIT will provide you with more future growth and some income, while the mortgage REIT will provide you with more current income and some growth.
The next two classifications you need to know are geographic and industrial. Both of these are pretty much self-explanatory; you can get a California REIT, or a Florida REIT, a Southwestern U.S. or even a Washington, D.C. REIT. Industry classifications will fall into office building REITs, mall REITs, hotel REITs and even nursing home REITs. Geographic REITs and industrial REITs also can be equity or mortgage combos.
The last two classifications aren't really as much classifications as they are "packaging." A hybrid REIT invests in two or more classifications - typically part equity and part mortgage. A PREIT (a finite REIT) is simply a REIT that has a predetermined ending date. It could be five, ten, or twenty years. Like all the others, they too can be equity, income, geographic, or whatever.
Now before you run off to buy 100 shares of XYZ REIT, you need to consider the risks. First of all, stocks will be stocks. They go up and down. And occasionally out. So always stick with class when it comes to REITs.
Next, REITs, like real estate in general, are long-term investments. Speculators are not welcome.
Third and last of all, if you are thinking of investing in REITs, do your homework. Visit the library. Call your broker. Get some annual reports and most important, diversify. Spread your eggs around. Start with a couple of REITs, and add to them regularly.
* * * * *
posted by Bob Moser at
9:02 PM
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