Paul Lorenzetti (717) 304-9524	RE/MAX of Lebanon County 1518 Cumberland Street Lebanon, PA 17042 (717) 270-8808	Steven Levengood (717) 821-3837

 COMMERCIAL REAL ESTATE 

Berks, Dauphin, Lancaster, Lebanon and Surrounding Counties

 

RE/MAX of Lebanon County

Real Estate Investment Trust

 

A real estate investment trust is a private or public corporation (or trust) that enjoys a special status under the U.S. tax code that allows it to pay no or little corporate income tax so long as its activities meet statutory tests that restrict its business to certain commercial real estate activities. Most states honor this federal treatment and do not require REITs to pay state income tax. By law, REITs must pay out 90% of their taxable income in the form of dividends.  The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.

 

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

 

To be valid as a REIT, it must:

• Be structured as corporation, trust, or association
• Be managed by a board of directors or trustees
• Have transferable shares or transferable certificates of interest
• Otherwise be taxable as a domestic corporation
• Not be a financial institution or an insurance company
• Be jointly owned by 100 persons or more
• Have 95 percent of its income derived from dividends, interest, and property income
• Pay dividends of at least 90% of REIT's taxable income
• No more than 50% of the shares can be held by five or fewer individuals during the last half of each taxable year
• At least 75% of total investment assets must be in real estate
• Derive at least 75% of gross income from rents or mortgage interest
• Have no more than 20% of its assets consist of stocks in taxable REIT subsidiaries.

While not suitable for all investors, investing in quality REITS over a period of time may produce favorable results. The simplest way to invest in REITs is to invest in REIT Mutual Funds. A REIT Mutual fund invests in a number of REITS, thereby spreading the risk among different individual REITS and possibly even types of properties.