A Real Estate Investment Trust (REIT) is a company or trust that invests or finances income-producing real estate. Investors buy shares and can benefit from regular dividends if the REIT is profitable as well as from a potential price appreciation.
A REIT usually focuses on a specific type of property segment, such as retail. A retail REIT deals with retail property investments like stand alone retail buildings and shopping malls.
What Is a REIT?
To qualify as a REIT specific qualifications must be met. Some of the requirements include:
- The majority of the REIT’s assets and income are related to real estate.
- At least 90% of taxable income earned by the REIT should be distributed to investors as dividends.
- Have a board of directors managing the trust.
- Shares owned in the REIT are fully transferable.
- After being established one year, the REIT needs over 100 shareholders.
- At least 75% of total assets should be invested in real estate.
There are additional requirements to qualify as a REIT, and it is important to understand these fully before attempting to form a trust.
REITs are formed for many reasons. The first is the potential tax benefits. A qualified REIT can deduct the dividends paid annually from the corporate taxes owed. So, if 100% of dividends are distributed to shareholders, there is the potential to owe no corporate tax.
For investors, REITs provide the opportunity to invest in a more diverse portfolio and earn a potential passive income if dividends are paid.
What Is a Retail REIT?
Retail REITs deal with investments in the retail real estate segment. The trust will purchase, sell, develop, and manage retail properties.
REITs earn income when there is a profitable transaction of buying and selling real estate and from owning real estate that has the potential to be income-producing. For a retail REIT this might come from collecting rent from retail tenants.
Retail real estate offers several potential benefits for REITs. First, retail tenants tend to be long-term renters, and might be open to signing long-term leases (i.e., up to 10 years). In addition, some retail properties have a triple-net lease where the tenant is responsible for maintenance, real estate taxes, and insurance in addition to their monthly rent.
Types of Retail Real Estate
There are several types of retail real estate that a REIT might invest in.
- Malls, both indoor and outdoor
- Big box retail locations
- Convenience stores
- Grocery stores
- Lifestyle centers without anchor stores
When investing in retail properties, the REIT will likely look at several things.
- What is the location of the property? Is it accessible?
- Is it already a successful retail business, or does it have the potential to be profitable?
- Will the property need to be developed or is it ready for tenants to occupy?
- If there are current tenants, are they reliable?
- If there are no current tenants, will the property be easy to lease?
- What are the demographics of the trade area?
Overall, retail is one of the largest commercial real estate segments, and many REITs choose to invest in this area. It is also a popular choice for investors who want to own shares in a REIT. As with any investment, it is important to research a REIT fully and consult with a financial advisor.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. There is no guarantee you will receive any income. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.