Real Estate Investment Trusts (REIT) offer a unique investment opportunity to invest in the housing market. We explain the benefits and mechanics of a REIT and how to invest in this option.
What is a REIT for?
The purpose of this investment vehicle is to allow corporations to reduce or even eliminate their liability for Corporate Tax by using the structure to invest in Real estate. As part of the rules for allowing this investment, the REIT is required to distribute 90% of their taxed income directly to their investors.
Types of REIT
A Real Estate Investment Trust can be either publicly listed on the stock exchange or privately held in the same way that a business can be designated as having private or public shareholders. They can be highly flexible in their terms of classification being either designated as equity, a mortgage or indeed a combination of the two.
Qualifying as a REIT
As you would expect there is a strict criteria for each Investment Trust that is set up in order to qualify for the tax advantages of being classed as a pass-through entity in respect of Corporate Tax. The main requirements are that it has to be structured as a Corporation, Trust or an Association which is jointly owned by a minimum of 100 individual persons.
It must achieve 95% of income from dividends, interest accrued or rental income which is then distributed as a dividend equal to at least 90% of the taxable income. The Trust must hold a minimum of 75% of their total assets in real estate investments and must be managed by a board of directors or appointed trustees. There are of course many other requirements and qualifying criteria but these are the most salient points of qualification.
This form of investment was originally introduced as far back as 1880 but the tax benefit was removed in the 1930’s not just by an act of law but also the great depression put paid to any immediate considerations towards real estate investment. Revived in the 1960’s in the U.S, the number of REIT’s grew substantially and peaked during the property boom that is for the time being, well and truly over. There are different types of Real Investment Trust’s available throughout the world and this type of investment accounted for $1trillion of investor’s money at the end of 2010.
Time to invest?
At this point in time, you could take a glass empty or half full approach to investing in a REIT. The recent financial crisis that engulfed the globe had a predictable but devastating effect on share values and some investors have suffered as much as a 70% decline in the value of their holdings. You could therefore view the continuing depressed state of the U.S economy as a warning to avoid investing for the time being or see it as an opportunity to buy in at vastly reduced values, meaning you could see a substantial gain when the market experiences another upturn.
Whether the time is REIT for you to invest is a matter of personal circumstances and your risk attitude, if you do see an opportunity you will almost certainly be gaining from a taxation point of view, but as always seek professional advice before parting with your money.
Guest post contributed by Hayley Russell on behalf of SunbirdFX.com –Sunbird have been making the use of the theory in their methodology. For more details visit their website.