What is an REIT?

There are many different types of businesses in which you can invest and earn profits, many of which that involve real estate. One important investment opportunity is a real estate investment trust, or REIT. This type of investment was created by Congress to give stockholders the opportunity to reap benefits from income-producing real property without having to go through the entire process of purchasing the property. There are different types of REITs and also many regulatory requirements for this potentially lucrative business endeavor.

Types of REITsFotolia_91167303_Subscription_Monthly_M-300x196

There are three main types of Real Estate Investment Trusts and the following is a brief description of each:

  • Mortgage REIT – These REITs invest in mortgages and can purchase mortgages, loan property owners money for mortgages, or can purchase securities that are backed by mortgages.
  • Equity REIT – These REITs invest in the properties themselves and commonly make profits from leasing property or selling property holdings. This is the most common type of REIT.
  • Hybrid REIT – These REITs invest in mortgages and properties.

In addition, REITs may be publically registered with the SEC or may be private, and shares may be purchased through mutual funds or on the open exchange.

Some REITs invest in diverse properties while others focus on a specific region or a specific type of property – such as shopping centers. Overall, REIT investments can result in liquid returns without having to put up the capital to purchase real property.

Rules Regarding REITs

Along with the opportunities that come with Real Estate Investment Trusts also come rules and requirements under federal law. Some of these requirements include, but are not limited to:

  • An REIT must have 100 or more shareholders
  • Five shareholders may not hold over half of the shares combined
  • REITs must be taxed by the IRS as corporations
  • 75 percent of the assets of an REIT must be invested in property or U.S. Treasury or cash
  • 75 percent of profits must come from real property
  • Must have 90 percent dividend payout ratios (which can be deducted from the REIT taxes), however, there can be reinvestment plans
  • 95 percent of the income earned by an REIT has to be passive income

Discuss REIT Opportunities with an Experienced San Jose Business Lawyer

While REITs can be lucrative business opportunities, there are also many laws with which an REIT must comply. If you would like to learn more about REITs or need assistance with one, please do not hesitate to call the skilled San Jose business attorneys at Structure Law Group, LLP today.