/ Category: While REIT is an acronym for "real estate investment trusts", they aren't the same as owning real estate. Simply explained, a REIT is a company that buys, develops, manages, and sells various real estate investments. Through a REIT, participants can invest in a professionally-maintained portfolio of various real estate properties. Some REITs will specialize in certain areas of investment while others are more diversified with the properties they invest in.
A REIT qualifies as what's known as a 'pass-through' entity through which companies are able to distribute a majority of its cash flow to its investors without facing taxation at the corporate level. Certain conditions need to be met for this to happen, including the fact that it must:
- Pay at least 90% of its taxable income to its shareholders annually
- Have at least 100 shareholders
- Have at least 75% of its total assets invested in real estate properties
- Generate at least 75% of its income from rent or mortgage interest from portfolio properties
The big difference between investing in a REIT and owning real estate outright is liquidity and the fact that you won't have to individually manage the properties invested in. As with other investment options, they aren't always safe investments but they have inherently shown to be less risky over the years when compared on a grand scale to conventional stocks.
While providing investment advice as to whether or not you should invest in REITs is outside the scope of this article, it should be said that because REITs must pay out high dividends in order to enjoy the tax benefits of their status, they can produce stable returns over time.
It's important to mention that analyzing a REIT and understanding its trends requires an understanding of how depreciation and market fluctuations can impact the investment. It is highly recommended that you speak with an investment advisor before determining if REITs are a smart investment for those undergoing retirement planning.
Tags: Investment for Income, real estate investment trusts, real estate properties
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