REITs allow investors of all kinds to invest in real estate without actually having to go out and buy, manage, and finance properties themselves . You can trade a REIT in the stock market. It gives you the opportunity to add real estate investment in your portfolio without going through the management hoop of those assets. If you want to invest in sectors like office spaces, rental properties, malls and even farmland, REIT is your way to go.
REITs get special tax treatment. As they pay out 100% of their taxable income to shareholders, they themselves don’t get taxed. But they need to fullfilll the following criteria: A REIT should
- Invest at least 75% of its total assets in real estate.
- Derive at least 75% of its gross income from real property rents, mortgage interest income, or real estate sales
- Each year, pay at least 90% of its taxable income to shareholders in dividends.
- Have a board of directors or trustees.
- A minimum of 100 investors must own shares in the REIT.
- 50% or less of its shares may be held by fewer than six individuals.
Why choosing to invest in REIT, I generally pay attention to some fundamentals specific to REITS. They are
- FFO(Funds From Operations) : FFO is calculated by adding depreciation, amortization, and losses on sales of assets to earnings and then subtracting any gains on sales of assets and any interest income.
- Dividend & Annual Growth: REIT generally have 5% dividend yield . Conjugated with the annual growth percentage , it might be able to beat the S&P.