Updated on September 13, 2021
What are real estate investment trusts? What are the basics and requirements for having real estate investment trusts?
There are many ways that a person or institution can invest in real estate. Common examples include house flipping, buying and renting out vacation rental properties, or buying commercial real estate and renting it out to tenants. However, a less well known but frequently utilized investment strategy is investing a Real Estate Investment Trust, or “REIT”. In this blog, we discuss some REIT basics to know and identify three main REIT requirements.
REITs are modeled after mutual funds and allow investors to pool their money into a number of real estate-related investments. Specifically, when purchasing shares in a REIT, an investor buys shares in an entire real estate portfolio. Often times, REITs are specific to a sector. For example, a REIT may include a number of properties in the healthcare sector, or in the energy sector. A REIT is led by a board of directors or a trustee, who generally lease the REIT’s portfolio of properties out to tenants, collect the income, and disburse it to the shareholders in the form of dividends. This is the most common type of REIT and is called an “Equity REIT”. However, some REITS are called “Mortgage REITs”, which finance real estate instead of owning real estate. Investors in Mortgage REITs are paid out through the interest earned on the loans.
REITs first originated in the 1960s. Today, they are governed by a complex series of laws including those in the Internal Revenue Code. Many of these laws fall into three broad categories:
Indeed, these requirements are in place for a number of reasons. For example, the requirements assure that the REIT’s portfolio is substantially comprised of real estate-related assets. Additionally, these requirements establish thresholds for REITs to help potential investors identify fraudulent REITs before they invest. To that end, it is important for investors in REITs to carefully vet a REIT before investing.
Legal issues involving REITs are often complex. If you have an issue involving a REIT, including but not limited to an issue involving fraud, you may want to consult with an attorney. The real estate attorneys at Schorr Law have years of experience assisting clients with real estate needs, including those involving REITs. Contact Schorr Law to see if you qualify for a free consultation today.