1)What is real estate investment trust ?
A real estate investment trust is also known as (REITs) in short.REITs are basically the companies that own, operate & Finance the income-generating real estate.REITs are corporations that manage the portfolio of high-value real estate properties & mortgages. In simple words, the corporations lease the property and collect the rent thereon. The rent which is collected is further distributed to shareholders as income and dividends.
Mostly REITs offer investor an oppourtinity to possess high valure property and enable them to earn dividen income to boost their capital eventually. This way, investors can utilize the opportunity to appreciate their capital and generate income at the same time.
Both big and small investors can invest in the funds and reap the benefits accordingly. Properties included in REITs comprise data centers, infrastructure, healthcare units, apartment complexes, etc.
2)How Does a Company Qualify as a REIT?
To qualify as a REIT, a company has to meet specific requirements as mentioned below.
- The entity must be structured as a business trust or a corporation.
- Extends fully transferable shares
- The is managed by a team of trustees or a board of directors.
- Must have a minimum of 100 shareholders.
- Less than 5 individuals should not have held 50% of its share during each taxable year.
- Is required to pay at least 90% of the taxable income as a dividend.
- Accrue a minimum 75% of gross income from mortgage interest or rents.
- A maximum of 20% of the corporation’s assets comprises stock under taxable REIT subsidiaries.
- A minimum of 75% of investment assets must be in real estate.
- A minimum of 95% of REITs total income should be invested.
3)Types of Real Estate Investment Trust (REIT)
The types of business REITs are design to help classify them better. Also, the methods devised to sell and purchase shares further help classify REITs.
This type of REIT is among the most popular ones. Typically, it is concerned with operating and managing income-generating commercial properties. Notably, the common source of income here is rents.
Also known as mREITs, it is mostly involved with lending money to proprietors and extending mortgage facilities. Further, REITs tend to acquire mortgage-backed securities. Mortgage REITs also generate income in the form of interest accrued on the money they lend to proprietors.
This option allows investors to diversify their portfolio by parking their funds in both mortgage REITs and equity REITs. Hence, both rent and interest are the sources of income for this particular kind of REIT.
These trusts function as private placements, which cater to only a selective list of investors. Typically, private REITs are not traded on National Securities Exchanges and are not registered with the SEBI.
Publicly traded REITs
Typically, publicly-traded real estate investment trusts extend shares that are enlisted on the National Securities Exchange and are regulated by SEBI. Individual investors can sell and purchase such shares through the NSE.