The Basics of Real Estate Investment Trusts You Should Know

Investing in real estate is often considered a smart way to diversify a portfolio. However, the illiquidity of this asset class makes the option less attractive. Luckily, there are ways to solve this problem and buying REIT shares is one of them.

REIT or Real Estate Investment Trust is a company that offers individuals to invest in a portion of a managed income-generating real estate pool (a REIT unit). In order to qualify as a REIT, a company must comply with International Revenue Code (IRC) and follow several criteria, such as:

- At least 75% of its assets must be invested in real estate, cash or US Treasuries

- At least 75% of its gross income should come from real estate

- At least 90% of its taxable income must be paid out as dividends yearly

- At least 100 shareholders are required after the first year

- Has to be managed by a board

Although there are several types of REITs, these core provisions apply to all and affect them in ways that will be mentioned throughout the article. Now let’s take a look at the variations of REITs.

By the type of holding:

- Equity REITs — buy, own and manage real estate by investing in property. The income is generated through rent and property appreciation over time. This is the most widespread type of REIT.

- Mortgage REITs — invests in property mortgages by lending to real estate owners through loans or acquisition of mortgage-backed securities. The income is generated through the interest rates (the net interest margin).

- Hybrid REITs — combine the above mentioned strategies.

All of them have pros and cons. For instance, mortgage REITs are subjects to interest rates fluctuations while equity REITs will suffer if individuals or institutions renting their properties become financially unstable.

By property type:

- Homes and apartments

- Offices

- Malls and shopping centers

- Resorts

- Infrastructure (pipelines, fiber cables)

- Warehouses

- Data centers

- Other/Mixed

The type of property can greatly affect the amount and causes of a REIT’s income fluctuations. For example, residential real estate will be impacted by the area’s demographics while office spaces and malls — by the business cycles and overall state of the economy. REITs associated with resorts will often experience seasonality while those involved in infrastructure can even be affected by regulatory and political changes.

By availability:

- Publicly traded — registered with Securities Exchange Commission (SEC) with shares traded on a securities exchange

- Public non-listed — registered with SEC with shares not traded on a securities exchange

- Private — not registered with SEC with shares not traded on a securities exchange

The publicly traded type surpasses the other ones in liquidity. At the same time, limited availability makes public non-listed REITs more stable.

Compared to other investment types, REITs offer multiple benefits. They win over direct investments in real estate by offering more liquidity and requiring less market expertise since a group of professionals is taking care of asset management. There is no need to purchase a whole property which decreases the entry barrier and ultimately improves portfolio diversification. REITs also have an advantage over common stocks, for which the board decides whether to distribute the access cash among shareholders or to reinvest it. This will never be a question for REITs as they are obliged to distribute the generated income by the IRC. Moreover, they do not suffer from double taxation like stocks do since the income is not taxed on the corporate level prior to dividend distribution.

REITs benefit from holding assets with long life spans that are likely to bring recurrent income and appreciate over time. As a result they provide stable cash flows to their investors in the form of dividends. Although they have to stick to one asset class, these trusts can achieve diversification through the locations and types of properties. Publicly traded REITs enjoy high liquiditymaking them easy to trade.

REINNO is looking forward to providing both a tokenized fund that would act as an improved version of a REIT and a platform for listing tokenized real estate. Our token holders will take advantage of blockchain technology to lower transaction fees, have faster deal execution and even more liquidity through trading on the secondary market. For more information on upcoming products, visit reinno.io