If you enjoy owning real estate, but abhor been a landlord, an investment in a REIT or real estate investment trust will be the best way to enter the real estate market. It is simply a tax structured corporate entity with main investments in real estate. The main reason for this designation is to prevent the need to pay any corporate tax. The Internal revenue code sect 856 governs the allowed definition of estate investment trust.
The investment trust must distribute 90% of any earnings back to investors as dividends. In order to take advantage of the internal revenue code sect 856 that governs reits, the following condition must be adhered to:
The real estate investment trust must be set up either as a trust, corporation or association
Must have a managing board of directors or trustees
The estate investment trust is required to pay back to investors at least 90% of it taxable income
Five or fewer persons cannot own more than 50% of the investment trust during the last six months of each taxable year
Over 75% of the investment trust reit total assets must be invested in real estate
Must have ways of transferring ownership in the form of shares or other certificates of interest
Cannot be engaged or known as a financial institution or insurance entity
100 or more persons or entities must form the ownership structure
Must derive at least 95% of its income from interest, property income and dividends
A minimum of 75% of the estate investment trust gross income must be from rents or mortgage interest
The trust cannot have more than 20% of its assets invested in other reit subsidiaries
A Real Estate Investment Trust is just an investment partnership structured using the generous provisions of IRS code sect 856 to avoid paying any corporate taxes. The capital from the partners that setup the trust is invested in income bearing assets like residential apartment buildings or commercial office buildings.
The internal revenue code also permits the investment trust reit to also invest in shopping malls, retirement homes and condominiums. Using estate investment trusts structure, it provides the perfect cover for people to own real estate investments without the headache of being a landlord. Real Estate Investment Trusts are allowed to be privately or publicly held. The public REITs can also choose to be listed on the public stock exchanges.
The three basic classifications for REITs are:
Equity Real Estate Investment Trusts ? usually own plus rent properties and collect total revenues from dividends, rental income and capital gains from sales of the properties.
Mortgage Real Estate Investment Trusts ? Mostly made up of mortgages pooled together as an investment. The returns are usually tied to interest rates, because any upward movement of interest rates lowers the investors returns.
Hybrid Real Estate Investment Trusts ? this is probably the best model as it combines the features of the stability of the equity reit while also providing the possible higher rates of return of the mortgage reit to form the perfect real estate investment trust vehicle.
When looking at this type of investment trust, you should pay close attention to the net asset value, the funds from operation, total expenses and the income available for distribution to the estate investment trust holders. Currently with the bad economy and down real estate market, many publicly traded REITS have seen their share prices plummet 30 to 60% in 2011.
A well diversified portfolio must include real estate investment and the best way to get all the benefits of been a landlord without the work is to setup a REIT or buy shares in an existing Real Estate Investment Trust.
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Related Posts:
Real Estate Investing ? Know Your Best Moves
Why Will You Become a Member of a Real Estate Investment Clubs?
Real Estate Investment Trust: Tips to Make the Right Choice
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Source: http://realestatenewscoverage.com/tips-on-reit-real-estate-investment-trust-13163.html
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