First in our “Real Estate Investment Trust” (REIT) series…

A real estate investment trust, also known as a REIT (pronounced “reet”) is a special tax designation for purchasing income property in the name of a corporation.  Think of REITs as the real estate equivalent of what mutual funds are to stocks.  REITs are formed for the purpose of eliminating corporate income tax on real estate investment income, but also for a few other reasons that may be attractive to the investor.

First used in the 1800s, the REIT’s original purpose was to help the investor avoid being taxed twice for real estate investment income.  Investors pool their funds into the REIT, and the REIT purchases and holds the properties.  To qualify as a REIT, the entity must be formed either as a corporation (the typical approach), a trust, or an association.  There must be 100 or more investors, the REIT must derive 75% or more of its gross income from real estate investment property income, and 75% of the REIT’s assets must be real estate.

A REIT is run just like any other corporation, with a board of directors, officers as required by the laws of the state in which the REIT is organized, and it may be privately or publicly held.  A publicly traded REIT is joined simply by buying stock, and is left just as simply.  Private real estate investment trusts, on the other hand, are slightly harder to take part in.  Private REITs usually require that the investor buy in with a minimum amount of cash and remain in for a minimum period of time.

Public REITs are simple to buy in or cash out of, however they tend to be less stable, growing or falling in value with market fluctuations.  The advantages of private REITs is that, even though they may have more restrictive rules, the investor will enjoy a more stable investment environment that is less influenced by the daily fluctuation of the trading markets.

Like any investment vehicle, a REIT can have both risks and drawbacks.  However, approached properly, the REIT offers one of the best real estate investment vehicles available to the investor today.

Next in the series…  The Legal Structure of the REIT.

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