By: Edward McCarthy
President: Sell By Owner Listings, Inc.

Introduction to REITs

A real estate investment trust is also known as an REIT. Although the definition of a trust refers to the position of trustee, an individual responsible for financial transactions on behalf of another, it is the combined term investment trust that truly defines an REIT. It is, in its truest form, a tax designation for a corporation investing in real estate that actually may serve to reduce or even altogether eliminate corporate income tax. The structure of a real estate investment trust corresponds to real estate investment much the same way as a mutual fund corresponds to investment in the stock market. The United States made REITs available to the public in order to give any and everyone a chance to invest in large-scale commercial property.

REITs pay little to no federal income tax but this benefit is given in exchange for the trust to distribute at least 90% of the taxable income, annually, in the form of dividends to the shareholders. Dividends are payments made by a company to its shareholders after making a profit. This money is usually guaranteed to the shareholders except in cases of extreme profit loss. Even in situations like this, retained earnings can be used to distribute dividends to the shareholders in order to remain within the provisos of the agreement so as not pay corporate income tax.

In a more recent development, many REITs have actually distributed all of their current earnings or sometimes even more than their current earnings. This can often result in dividend yields comparable to bond yields. If in fact an REIT distributes more than its taxable income, the extra distribution is considered a return of capital for tax purposes. This means it is taxed as a capital transaction, rather than regular income. The distribution requirement may hinder a REIT's ability to retain earnings and generate growth from internal resources. Governed by the IRS code for dividend distribution, the REIT has a difficult time wooing growth-oriented investors. This can be offset by the appreciation of stock but as always, the actual check and balance of the finance situation of the trust is on a case by case basis.

Real investment can be an intimidating process but as with anything, there is assistance available. Mutual funds can be seen as a way for those less confident in their stock savvy to join together with like-minded individuals and to profit from a well-rounded portfolio. A real estate investment trust is very similar to the mutual fund. It is, in its own arena, a means of pooling together various finances as well as a recruitment tool for investors in order to capitalize off of the real estate market. REIT investment is a relatively safe avenue to take when attempting to break into the ever fluctuating real estate market. It is a place where novice investors can go and feel safe and secure in their investment endeavors. The full brunt of any loss that may happen is taken by the corporation and even in a losing situation; dividends are often still available for distribution. This is unheard of in the stock market.

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