Real Estate Investment Trusts, aka REIT’S, as an industry, have grown substantially over the last twenty years. The tax laws governing a REIT are rather generous; that in itself maybe the leading factor to the overall growth. Or maybe it was that real estate bubble that lasted for decades. Either way, REIT’s have skyrocketed over the last 20 years, from just over $40B, to over $810B.
There are three categories of Real Estate Investment Trusts; Equity, Mortgage and Hybrid. An Equity REIT is one that generates its revenues from rental properties. A Mortgage REIT, earns its revenues through mortgage financing, interest, and costs affiliated. The Hybrid REIT is a combination of both Equity and Mortgage based transactions, affording the ability to benefit from both sides.
When you invest into a Real Estate Investment Trust, you are investing into something real and tangible, a physical asset (brick and mortar). Be it commercial or residential rental properties, like apartments and malls, have mortgages which are secured by commercial or residential property. You inevitably own something, not just a piece of paper, but real property. This is what separates investing in common stock over a REIT. Some consider this route to be a safer bet, rather than just purchasing common stock in the open market.
Tax laws are most generous affording REIT’s the luxury of being tax free. Using our knowledge bank at Investopedia to explain it best:
Probably the most important, advantage that REITs provide is their requirement to distribute nearly 90% of their yearly taxable income, created by income producing real estate, to their shareholders. This amount is deductible on a corporate level and generally taxed at the personal level. So, unlike with dividends, there is only one level of taxation for the distributions paid to investors. This high rate of distribution means that the holder of a REIT is greatly participating in the profitability of management and property within the trust, unlike in common stock ownership where the corporation and its board decide whether or not excess cash is distributed to the shareholder.
When the markets opened up this week, we all heard rumors of The Paramount Group. Based out of New York, this Real Estate Investment Trust was getting ready to do what no other REIT has down before. An IPO that was set to break all the records in the history of the industry. (Referring to the REIT Industry).
IT DID! This office landlord raised $2.3 Billion in its initial public offering, the largest ever for a U.S. real estate investment trust.
Whether REIT or wrong, you can see what makes this investment appealing to many.