What are REITs?

 

 Real Estate Investment Trusts or REITs can be a corporation, business trust or association that acts as an investment agent that acquires or provides financing for the acquisition of real estate or real estate mortgages or even a combination of both.  It basically combines the capital of many investors to purchase any form of income producing real estate.  In most countries, REITs are often accorded special tax breaks where they are not required to pay any corporate income tax if it distributes the majority (usually 90% to 95%) of its taxable income to shareholders each year.

Unlike property stocks, REITs is akin to holding personal property where the taxation of income takes place at the investor level rather than at the company level.  In certain countries, dividends or distributions are also not taxed.  So there is an added advantage for investors to own it. REITs are usually traded just like any stock or share on the stock exchange.  They are easily liquidated compared to owning a real property.

Different type of REITs

REITs can be classified as equity REITs, mortgage REITs or Hybrid REITs.  Mortgage REITs are more common in the United States compared to the Asia Pacific region where most of the REITs are equity REITs.

Equity REITs invest in and own usually immovable properties with revenues and income derived mainly from the rental income of these properties.  Most equity REITs are spun off by property developers who aim to free up capital for their core business of property developing which gives them a better return of investment compared to owning property just for rental yield of less than 10%.

Mortgage REITs invests in loans that are secured by real estate or mortgage backed securities.  Their revenues and income are usually derived from the interest paid for the mortgage loans or the difference in rates at which they borrow and lend out money.

There are some REITs that are also a hybrid of both equity REITs and mortgage REITs.