What Is a REIT Stock And How Can It Help You Earn Passive Income?

If you’ve ever considered investing in real estate but don’t want the hassle of dealing with all the problems that come from owning physical property, then you’ll be happy to learn there’s a product out there that can provide you with all these benefits.

It’s called an REIT and its one of the lesser known assets available out there on the stock market.  It’s real value is that it can help you earn passive income just as if you owned real estate.   However, before you should invest in one, it is first important to understand what is a REIT stock and why or why not it might make a good fit for your investment portfolio.

What is a REIT Stock?

An REIT is an acronym used to refer to Real Estate Investment Trust.

To clear things up, it’s not really a stock at all.  It is basically a security that is sold in major exchanges where investors invest directly into real estate either through properties or mortgages.

On of the major advantages of an REIT is that it receives special tax considerations. It is also one of the highly liquid methods used to invest in real estate and offers high yield profits.

Unlike other stocks, REIT’s allow for investment and ownership of property through buying shares on given properties/mortgages or enrolling for a mutual fund. A REIT basically refers to a company that owns and invests in profitable real estate that produce valued income from time to time. Since it is modeled after mutual funds, this type of stock offers investors of all types with regular streams of income and diversification as well as long-term capital appreciation.

REIT’s pay all the taxable income to investors (shareholders) in form of dividends on which the shareholders then pay tax on. Any type of investor can invest in high-scale property just the same way it is done in other industries.

What Qualifies a REIT Company?

To qualify as a real estate investment trust company, certain conditions must be met. They include the following;

• The company must have an investment of at least 75% (of total assets) in real estate
• At least 75% of its total gross income should be derived from real estate through interests from mortgages as well as direct sales and financed property
• At least 90% of its taxable income must be paid to shareholder dividends per year
• The entity must be a taxable corporation and managed by trustees or a board of directors
• The minimum number of shareholders required to become a REIT is 100
• Five or fewer individuals must not own more than 50% of all the shares

Without satisfying all these requirements, no company can qualify as a real estate investment trust that is listed on major stock exchanges across the globe.

Where Are REIT’s Sold?

As mentioned above, REIT shares are sold in major stock exchanges. However, you can still find public non-listed stocks as well as private REIT’s. These options exist in many sectors of the economy and REIT property exist in virtually all states in the US supporting about 1 million jobs annually in the region. They cover hotels, apartments, industrial facilities, hospitals, offices, infrastructure, shopping malls, nursing homes, student housing, storage centers and even timber-lands among others.

Most REIT’s depict the US model and the legislation has been adopted in 30 different countries already. By the end of January 2014, there were about 204 REIT companies in the US registered with SEC (securities and exchange commissions). A majority of the REITS trade under the New York Stock Exchange and the total market capitalization of all REITs amount to $719 billion. According to IRS statistics, around 1100 REIT’s have filled tax returns. This is because there are some that are registered with the SEC but not publicly traded.

Types of REIT’s – The Equity REIT and Mortgage REIT:

There are two main types of REITs available in the market and a third less popular one which cuts across the two is also provided.

• Equity REIT’s – These REIT’s invest in, and own properties. They are responsible for the value (equity) of the real estate assets they own and their income is chiefly driven from the rents of these properties.
• Mortgage REIT’s – These are REIT’s that deal with investing and owning property mortgages. They basically loan money to mortgage investors. They also purchase mortgages or mortgage-backed securities. Their income is derived from interests collected on mortgage loans.
• Hybrid REIT’s – these are less popular options that combine the strategies used in Equity and Mortgage REIT’s. They deal with investments in both and earn income from the same.

How an REIT Helps You Earn Passive Income:

One of the many benefits of investing in REIT stocks is that you continue to make passive income without any further investments. Since real estate assets and properties often appreciate in value, the income earned by the REITs also goes up. As clearly illustrated in the qualifications required for REITs, about 90% of all profits are paid at the end of the year to shareholders in terms of dividends.

Additionally, REIT stocks have an extra feature that accompanies them known as DRIPs (Dividend reinvestment plans). This feature allows investors to reinvest the dividends paid to them by acquiring more shares which translate to more profits. Once you have purchased shares, the dividends keep coming until you decide to sell them.

Unlike partnerships, REITs are vertically integrated real estate companies. They invest, own and manage real estate assets and their shares are traded in major stock exchanges just like other stocks.

The Benefits of a REIT:

REIT’s offer investors various benefits that include the following:

• Diversification – Form a long-term view, REITs offer a platform that helps investors an opportunity to stretch into other stock markets.
• Dividends – Unlike most stock options existing in the market, REITs offer shareholders with dividends and steady income streams.
• Liquidity–It is very easy to buy and sell stocks listed as REIT than it is with other
• Performance – When compared with other renowned stocks like S&P 500, NASDAQ Composite and Dow Jones Industrial Average, REIT’s have shown to perform better in the long term.

REIT’s also offer more transparency especially since the same policies and rules used for other publicly traded securities are used.

Potential Disadvantages of a REIT:

Although REIT’s offer steady income streams, they also have various drawbacks.

One of the major concerns is that REIT’s are sensitive to demand for other high-value assets. For instance, rising interests may make Treasury assets more lucrative and therefore draw funds from real estate thus lowering share prices and affecting both profits and trading power.

REIT’s also pay taxes which make up close to 25% of their total operating expenses. What’s more, REIT taxes imposed on dividends are often higher than the 15% taxed on other stocks.

Conclusion:

An REIT can be a very lucrative and creative way to invest in real estate and mortgage backed securities without actually owning any physical property.  They will provide you with a steady stream of above-average dividends and good portfolio diversification.  However be aware that like all securities their value can decrease depending on the markets.  Plus the tax implications should be considered and weighed against other types of investment opportunities.  Be sure to check with your tax professional if you are unsure.

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