What is a REIT Company?

This was reversed in the 1930s, Bangkok – bangkok.thaibounty.com – when passive investments were taxed at both the corporate level and as part of individual income tax. A corporation must meet several other requirements to qualify as a REIT and gain pass-through entity status. ­At least 95 percent of a REIT’s gross income must come from financial investments (in other words, it must pass the 95-percent income test). REIT proponents were unable to persuade legislation to overturn this decision for 30 years. These include include rents, dividends, interest and capital gains. Because of the high demand for real estate funds, President Eisenhower signed the 1960 real estate investment trust tax provision qualifying REITs as pass-through entities.

So how do you go about choosing a REIT? Most investors know that past performance is no guarantee of future performance. Even though REITs are somewhat diversified by definition, it is still important to determine whether or not a specific REIT focuses on one type of commercial development or one geographic area that could leave it vulnerable to a downturn. These will have a direct impact on rent levels and occupancy rates — which in turn affect cash flow and dividends. For this reason, many investors invest in more than one REIT. Consider demographic information such as population growth, employment growth and the level of economic activity for the particular area or industry.

Private REITs generally are subject to less regulation, with the exception of guidelines associated with maintaining REIT status. There are almost 800 private REITs in the United States. There are nearly 200 publicly traded REITs registered with the SEC and traded in major stock exchanges such as the New York Stock Exchange, NASDAQ and the American Stock Exchange. Because they’re traded on an exchange each day, publicly traded REITs are simple for investors to buy or sell and offer great liquidity.

In addition, at least 75 percent of its income must come from certain real estate sources (the 75-percent income test), including rents from real property, gains from the sale or other disposition of real property, and income and gain derived from foreclosure of property. Let’s start with the three REIT categories: equity, mortgage and hybrid. Not only are there different categories of REITs, many different property types and classifications can comprise them. Thanks to Jason Caudill for his assistance with this article. ­REITs are part of an extremely diverse industry. We’ll look at the different types of REITs next. Equity REITs (EREITs) purchase, own and manage income-producing real estate properties such as apartments, malls and office buildings.

Under generally accepted accounting principles, net income typically assumes that the value of assets goes down over time — somewhat predictably. On the balance sheet under GAAP, however, land remains at its historical cost and buildings gradually depreciate to zero. Real estate generally retains or even increases in value. Since a REIT’s primary business involves real estate, the depreciation charges negatively skewed the company’s true profitability. FFO is not a foolproof measure, however. FFO was adopted to address that problem by excluding depreciation costs from the net income figure. Not all REITs calculate it according to the NAREIT definition and items such as maintenance, repairs and other recurring capital expenses are missing from the formula.

Because of their pass-through taxation, REITs have greater profits from which to pay shareholder dividends than similar sized corporations. As long as a REIT maintains its tax-qualified status by paying out 90 percent of its net income to common shareholders, it doesn’t have to pay federal income taxes. Because REIT income often comes from commercial properties with long lease periods, REITs can offer a relatively predictable revenue stream. Without a tax bite to reduce profits, shareholders get more of the REIT’s earnings. REIT investors receive value in the form of dividend income and potential share value appreciation.