In this article, I’m going to take a look at Investors Real Estate Trust’s (NYSE:IRET) latest ownership structure, a non-fundamental factor which is important, but

What are real estate investment trusts (REITs)?

Real Estate Investment Trust (REIT for short) is a type of security that invests in real estate. A REIT investor earns a share of income produced from investing in real estate without having to buy or finance a property. REITs provide investors with liquidity while offering special tax considerations. REITs are classified into two categories:

  • Equity REITs invest in and own properties with revenues mainly coming from renting or leasing space. Investors enjoy a wide range of properties to select from, including offices, shopping centers, hotels, and apartments.
  • Mortgage REITs invest in and own property mortgages. They get most of their revenue from interest earned on their investments in mortgages or mortgage-backed securities. Since mortgage REITs rely heavily on interest, an increase in the interest rate can be risky.

The main requirements that will qualify you for a REIT are:

  1. At least 75% of the corporation’s income must be earned from real estate as rent, from real estate interest, or from the sales of real estate assets;
  2. At least 75% of the corporation’s assets must be real estate assets; and
  3. At least 95% of income must be passive.

REITs work like a mutual fund in a way where big and small real estate investors invest in a pooled, managed property. REITs enable investors to own a share of the value of the property, while also earning income from leasing it. This method is excellent for the average investor who doesn’t have big capital or free time. Another advantage of REITs is the diversification of your real estate investment portfolio that the nature of this method has generated. Of course, the more diverse your investment portfolio is, the fewer the risks associated with it.

Related: How to Reduce Risk in Your Real Estate Portfolio

Last but not least, what makes REITs more desirable is that REITs distribute nearly 90% of their yearly taxable income to shareholders as taxable dividends. This means that REITs do not pay taxes at the corporate level, but instead each investor incurs an individual income tax on the portion of the dividend.

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