Your Guide to REITs: How You Can Profit from Real Estate

If you have ever wanted to build wealth through real estate but didn’t want the hassle of managing a building or the burden of a massive mortgage, you aren’t alone. Since 1960, thanks to a move by Congress, you have had the opportunity to benefit from income-producing real estate through Real Estate Investment Trusts (REITs). These entities allow you to own or finance property in the same way you might own stocks in any other major corporation.

How You Benefit from Different REIT Types

When you look into the REIT industry, you will find a diverse profile of companies that generally fall into two categories. Depending on your goals, you might choose:

• Equity REITs: If you want to benefit from rental income, these companies are for you. They own and manage everything from offices and shopping centers to hotels and apartments, passing the rent they collect on to you.
• Mortgage REITs: If you prefer to earn from financing, these REITs provide the capital for residential and commercial properties. Your revenue here comes primarily from the interest earned on mortgages or mortgage-backed securities.

You can access these investments in various ways; you might buy shares of publicly traded REITs on major stock exchanges, or you may find opportunities in publicly registered non-traded REITs and private companies.

The Rules That Protect Your Investment

For a company to maintain its status as a REIT and provide you with unique tax advantages, it must follow strict rules overseen by the IRS. As an investor, you should know that:

• Asset and Income Minimums: At least 75% of the corporation’s assets must be real estate, and 75% of its gross income must be earned from real estate sources like rent or interest.
• Passive Focus: At least 95% of the income generated must be passive.
• Direct Payouts to You: Unlike many corporations that keep their earnings, a REIT is required to distribute at least 90% of its taxable income to you and other shareholders every year as dividends.

Because of this structure, the REIT itself typically pays no tax at the entity level. Instead, you pay taxes on those dividends at your ordinary income rate, which currently tops out at 39.6%.

By choosing to invest in REITs, you are taking advantage of a system designed specifically to make the benefits of high-quality, income-producing real estate accessible to you and everyone else, regardless of your background or the size of your bank account. It is a powerful way for you to participate in the broader economy while maintaining a long-term investment horizon.