Many people say investing in real estate is one way to build wealth without a need for tons of money or time. This could also be your reason, or you are looking at is the best platform to invest for long-term returns However, before making up your mind to invest in REITs, there is a lot to learn about it. For instance, what would you say if someone asks you what is a REIT? How do you calculate your dividends?
What are the possible risks of investing in REITs? Perhaps you have a clue if you’ve visited Bugis Credit. While the questions sound critical to first-time REITs investors, it is vital to have a bold picture of where you are putting your money before making any financial commitment.
What Is A REIT?
First things first, how do you understand a REIT? REIT (Real Estate Investment Trust) is a unique investment company that allows its investors to pool their money and invest in real estate. Some people would define it as a company that owns, operates, or finances income-generating properties. There are three major types of REITs: those that buy properties and rent them, those that develop properties from the ground and rent them, while others don’t own properties but choose to focus on mortgage and financing. Therefore, as a first-time investor, you should first think about which type of REIT to invest in.
REITs are oversimplified and you can see it as a mutual find for investment. This is why many investors buy shares and contribute money to a pool, letting REIT managers decide how to invest it. Therefore, REITs’ core purpose is to allow investors to invest in property they wouldn’t be able to. For instance, how could you buy a high-rise tower or a portfolio of mortgages without helping? Where would you start from? Unless you have an account full of millions of dollars, investing in the housing market is a tricky subject that you are not ready to risk your money on. Therefore, REITs allow you to identify potential areas to put your money and manage it for you. You can even win a billion-dollar property portfolio with a few dollars.
How Does A Company Qualify to Be A REIT?
After understanding what a REIT is, it is important to learn that not all companies dealing with property investment qualify to be REITs. Most REITs are involved with leasing spaces, collecting rents, and finally distributing the income earned as dividends to shareholders. Remember mREITs or mortgage REITs do not own any property but facilitate the process by financing the mortgage. Therefore, for a company to qualify as a REIT, it must fulfill the following requirements.
- A company must invest at least three-fourths of its assets in real estate or related assets and derive three-quarters of their income from these assets. In summary, a REIT company has to derive at least 75% of its total income from rentals, mortgages, third-party management fees, or other related assets.
- REIT must be classified as a corporation and have at least 100 shareholders. This is the reason many REITs start as real estate partnerships and convert to REITs later.
- Five or fewer shareholders can own not more than 50% of REITs shares. REITs limit the ownership of a single investor to 10% to ensure they comply with this rule.
- REITs have to pay out at least 90% of their taxable income to their shareholders. To comply with this rule, most REITs payout 100% or more of their taxable income.
Why Would A Company Want to Be A REIT?
There are strict requirements for a company to be classified as a REIT. However, this doesn’t mean that companies would fear becoming REITs. With these harsh rules, many benefits motivate a company to be classified as a REIT, starting with tax matters. REITs are not categorized as ordinary corporations during taxation. This means that REIT does not pay corporate tax, no matter how much profit it makes. The question is how does 90% payout come in? Does it mean REITs do not pay tax?
Since REITs are required to pay out most of their income, they are treated as pass-through entities and taxed at the individual level.
This is an added advantage because most dividend-paying companies are taxed twice; that is, they have to pay corporate income tax when they earn a profit, which is currently at 21%, and dividend taxes at the individual level are shared to the shareholders. However, REIT dividends taxes are slightly higher than most stock dividends with a complex tax structure. But this remains a significant advantage to REITs and their investors.
Why Would You Invest In REIT?
Many investors see REITs as an avenue to gain property ownership at a very low cost. Tax benefits are also the reasons why most investors turn to REITs because most REIT income is tax-free. However, there are other reasons why REITs can be a perfect long-term investment opportunity, including;
- REIT is a source of a reliable, growing income for beginners. Since equity REITs lease property, collect rent and share dividends to the shareholder, this can be a reliable way for you to earn income, either quarterly or semi-annually.
- It is a smart way to add diversification to your investment portfolio. Instead of seeing a dividend-earning avenue, consider REITs as a diversification to your income sources. REITs are technically stock representing real estate assets but cannot be coordinated with the stock market.
- REITs offer an easy way to get started with real estate investing. You can easily buy shares in any publicly-traded REIT than investing directly in the real market, even when you have a property manager to oversee every operation.
There is a lot to learn about REITs investment. The biggest struggle that blinds most investors from investing in the real estate market is the tens and hundreds of thousands you need to get started. This is why REITs offer a simple avenue for you to enter the rental market with a few dollars. However, the investment’s simplicity should not fool you to put your money in the property market without having all the basics at your fingertips. Therefore, if you consider investing in REITs, take your time to look at its merits and risks.