Real estate: investment funds (REITs) - how they work and how to invest

What is a real estate investment trust company (REIT)? A real estate investment trust company (REIT) is a company that owns, manages, or finances income-producing real estate. IDKNs, modeled after mutual funds, pool capital from multiple investors. This allows individual investors to receive dividends from real estate investments without buying, managing or financing any properties themselves.

Key Points:

• IDCN is a company that owns, manages, or finances income-producing real estate properties.
• ENDIDKN generate stable income for investors, but offer few opportunities for capital''growth.
• Most IDCNs are publicly traded, making them highly liquid (unlike investments in physical real estate).
• IDCN invest in a variety of property types, including apartments, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses.

How do IDCNs work?

Congress established the IDKN in 1960 as an amendment to the cigar tax. It allowed investors to buy shares in commercial real estate portfolios, something that was previously only available to wealthy individuals and through large financial intermediaries. Properties in an IIRC portfolio can include apartments, data centers, medical facilities, hotels, infrastructure in the form of fiber optic cables, towers''cellular communications and energy highways, office buildings, retail centers, warehouses, etc. Typically, IIRCs specialize in a particular real estate sector, but diversified and specialized IIRCs may have different types of properties in their portfolios. Many IIRCs are traded on major stock exchanges and investors can buy and sell them like stocks during the trading session. These IIRNs are usually traded with high volume and are considered very liquid instruments.

What qualifies for IIR status?

Most IDKNs have a simple business model: the IDKN leases space and collects rent from the properties, then distributes that income as dividends to shareholders. Mortgage IIDCNs do not own the real estate, but''finance it. Such IIRCs earn income from the interest on their investments. To qualify as an IIRC, a company must comply with certain provisions of the Internal Revenue Code (IRC). These requirements include the following:

• Invest at least 75% of total assets in real estate, cash or U.S. bonds.
• Earn at least 75% of gross income from rent payments, interest on mortgages that finance real estate, or the sale of real estate.
• Pay at least 90% of taxable income as dividends to shareholders each year.
• Be a legal entity taxed as a corporation.
• Governed by a board of directors or fiduciaries.
• Have at least''100 shareholders after the first year of existence.
• Not have more than 50% of shares owned by five or fewer individuals.

It is estimated that IIRCs collectively hold about $3.5 trillion in assets; publicly traded IIRC shares total $2.5 trillion.

The types of IDCNTAsG/h3>

There are three types of DCFS:

• Shareholder IDCNs. Most IDKNs are equity IDKNs that own and manage income-producing real estate. income is generated primarily through rental payments (rather than through the resale of real estate).
• Mortgage IDKNs. Mortgage IDKNs make loans to real estate owners and operators either directly through mortgages and loans or indirectly through the purchase of secured''mortgage-backed securities. Their income is generated primarily from the difference between the interest they earn on mortgage loans and the cost of funding those loans. This model makes them potentially sensitive to interest rate increases.
• Hybrid IIDCNs. These IIDCNs utilize the investment strategies of both equity and mortgage IIDCNs.

IDCNs can be further categorized based on how their shares are purchased and retained:

• IDKNs traded on an exchange. Shares of publicly traded IDKNs are listed on a national stock exchange where they are bought and sold by individual investors. They are regulated by the U.S. Securities and Exchange Commission (SEC).
• IDKNs that are not traded on an exchange. These''IIRCs are also registered with the SEC, but are not traded on national stock exchanges. As a result, they are less liquid than publicly traded IIDCNs. However, they tend to be more stable because they are not subject to market fluctuations.
• Private IIDCNs. These IIDCNs are not registered with the SEC and are not traded on national stock exchanges. In general, private IIRNs can only be sold to institutional investors.

How to invest in IDKN

You can invest in publicly traded IDKNTs, as well as mutual fund IDKNTs and exchange-traded fund (ETF) IDKNTs, by buying shares through a broker.

The IIRCs do not offer many opportunities for capital gains. As part of their structure, they must pay out 90% of their income to shareholders. Thus, only 10% of taxable income can be reinvested in IDKNs to buy new assets. Other negatives are that IDKN dividends are taxed as ordinary income, and some IDKNs have high management and transaction fees.

Fraud in IDKN

The US Securities and Exchange Commission (SEC) recommends caution when buying IDKNTs that are not registered with the SEC. It warns, "You can check the registration of both publicly traded and non-publicly traded IICDNs through the SEC's EDGAR system. You can also use EDGAR to''familiarize yourself with the annual and quarterly reports of the DCPI and any prospectus offering'. It is also a good idea to check the broker or investment adviser recommending the IIKN. The SEC has a free search tool that allows you to check whether an investment professional is licensed and registered.

A real-life example of an IDKN

Another aspect to consider when choosing an IDKNT is the sectors of the real estate market that are booming. What are some promising sectors of the economy, in general, that can be tapped through real estate? As an example, healthcare is one of the fastest growing industries in the U.S., especially in medical buildings, outpatient centers, senior living facilities and boarding houses.''Several IDKNs are focusing on this sector. An example is Healthpeak Properties (PEAK) - formerly HCP. As of April 2022, it had a market capitalization of about $18.9 billion, with about 4 million shares traded per day.Its portfolio focuses on three main asset classes: research buildings, medical offices and senior housing, holding interests in more than 615 properties.

What does IDKN stand for?

IDKN stands for Real Estate Investment Trust, which stands for Real Estate Investment Trust Company. IDKNs are organized as a partnership, corporation, trust or association that invests directly in real estate by purchasing properties or buying mortgages. IIDCNs issue stock,''which are traded on a stock exchange and bought and sold like ordinary shares. To be recognized as an IIRC, a company must invest at least 75% of its assets in real estate and derive at least 75% of its revenues from real estate-related transactions.

Do IDKNs have to pay dividends?

The law and regulations require IDKNs to pay 90% or more of their taxable income to shareholders in the form of dividends. As a result, IDKNs are generally exempt from most corporate income tax. IDKN shareholders who receive dividends are taxed as if they were ordinary dividends.

What is a "stapled IDKN"?

"The "bracketed" IIRC expands the tax advantages available'''IDKN, allowing them to also manage properties that cannot normally be operated by trust companies of this kind. It is so named because it involves two different entities that are "bracketed" by a contract in which one entity owns the property and the other manages it. "Stapled" DICNs involve greater oversight of compliance with the law because conflicts of interest can arise, so this form of DICN is not simple. It is similar to a "bracketed" DCPI, but more flexible in structure.