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60s Finance: Buy to Let vs REITs - #21
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What Is a Real Estate Investment Trust (REIT)❓
Congress established real estate investment trusts (REITs) in 1960 as an amendment to the Cigar Excise Tax Extension of 1960.
The provision allows individual investors to buy shares in commercial real estate portfolios that receive income from a variety of properties.
Properties included in a REIT portfolio may include apartment complexes, data centres, health care facilities, hotels, infrastructure—in the form of fibre cables, cell towers, and energy pipelines—office buildings, retail centres, self-storage, timberland, and warehouses.
How does a REIT work❓
The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders.
Rules to be a REIT👨🏫👩🏫:
• Invest at least 75% of its total assets in real estate, cash or U.S. Treasury’s
• Receive at least 75% of its gross income from real property rents, interest on mortgages financing the real property, or from sales of real estate
• Return a minimum of 90% percent of its taxable income in the form of shareholder dividends each year
• Have a minimum of 100 shareholders after its first year of existence • Have no more than 50% of its shares held by five or fewer individuals during the last half of the taxable year.
Key points🔐:
• A real estate investment trust (REIT) is a company that owns, operates or finances income-producing properties.
• Equity REITs own and manage real estate properties.
• Mortgage REITs hold or trade mortgages and mortgage-backed securities.
• REITs generate a steady income stream for investors but offer little in the way of capital appreciation.
• Most REITs are publicly traded like stocks, making them highly liquid—unlike most real estate investments
• Return a minimum of 90% percent of its taxable income in the form of shareholder dividends each year
Pros👍
• Liquidity
• Diversification/Counterweight to other assets
• Transparency
• Steady dividends
• Risk-adjusted returns
Cons👎
• Low growth/Little capital appreciation
• Non-tax-advantaged
• Subject to market risk
• High management and transaction fees
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