REITs

1. Definition

REITs (Real Estate Investment Trusts) are companies that own, operate, or finance income-producing real estate. * They are modeled after mutual funds, allowing individual investors to earn dividends from real estate investments without having to buy, manage, or finance any properties themselves.

2. The 90% Rule

To qualify as a REIT and avoid paying corporate income tax, a company must comply with strict rules, the most important being: * Payout: They must distribute at least 90% of their taxable income to shareholders annually in the form of dividends. * This structure makes REITs significantly higher-yielding than most regular stocks.

3. Types of REITs

1. Equity REITs: Own and operate physical properties (Offices, Malls, Apartments). They generate income through collecting rent. (Most common).
2. Mortgage REITs (mREITs): Provide financing for real estate by purchasing or originating mortgages. They earn income from the interest on these loans.
3. Hybrid REITs: A combination of both.

4. Why Invest?

• Liquidity: Unlike physical real estate, REIT shares can be easily bought and sold on major stock exchanges.
• Diversification: They offer exposure to the real estate market, which often has a low correlation with other equities, helping to balance a portfolio.
• Inflation Hedge: Rents and property values tend to increase during periods of inflation.