Definition of "Real estate investment trusts (REITs)"
Type of investment company that invests money in mortgages and
various types of investment in real estate, in order to earn profits for shareholders. Shareholders
receive income from the rents received from the properties and receive capital gains as properties
are sold at a profit. REITs have been formed by a number of large financial institutions such as
banks and insurance companies. The stocks of many of them are traded on security exchanges, thereby
providing investors with a marketable interest in real estate investment portfolio. By law, REITs
have to distribute 95 percent of their income to shareholders, and in turn they are exempt from
corporate taxes on income or gains. In exchange for this special tax treatment, REITs are subject to
numerous qualifications and limitations including:
- Qualified asset and income tests. REITs are required to have at least 75% of their value
represented by qualified real estate assets and to earn at least 75% of their income from real
- Shareholder qualifications. Generally, REITs are not permitted to be closely held and must have
a minimum of 100 shareholders.
There are three types of REITs. An equity trust invests their assets in acquiring ownership in real
estate. Their income is mainly derived from rental on the property. A mortgage trust invests in
acquiring short-term or long-term mortgages. Their income is derived from interest from their
investment portfolio. A combination trust combines the features of both the equity trust and the
mortgage trust. Their income comes from rentals, interest, and loan placement fees. Disadvantages of
REITs are potential losses from the market decline and high risk.
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