Trillionaire Term of the Day - March 3, 2009 - REITs

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Real Estate Investment Trust (REIT)

During the 1960’s, congress created the Real Estate Investment Trust (REIT) with the intention to allow everyday investors to invest in large-scale real estate properties through the stock market.  REITs (pronounced Reets) essentially act like normal stocks, and they are traded on major stock exchanges such as the NASDAQ.  The one key difference that sets them apart from normal stocks is that REITs invest in real estate, with at least 75% of their income coming from real estate endeavors. REITs normally act as promising investments, as they usually receive a high yield of return (between 5-10% per year). These high returns come partly from the numerous tax benefits that these companies receive during the process of buying, selling, and holding real estate. These corporations are required to distribute 95% of their income, which allows them to avoid the corporate income tax.

Equity REITs invest in multiple real estate properties ranging from shopping centers, large shopping malls, apartment complexes, office buildings, warehouses, etc. These REITs can hold the property while producing income through rent and they can sell the property as it appreciates in value. REITs can also purchase old, rundown, undervalued properties with the intention to fix them. With the right moves, this can be a highly lucrative and quick investment. Lastly, the REIT can purchase a high income producing property such as a shopping mall or apartment complex at a low price and be able to receive large amounts of income through rent. 

A Mortgage REIT is an investment fund that deals with property mortgages in three different ways. The first and most simple way of investing in mortgages is to loan out money to property owners for their mortgages (like a bank). The money made through the compound interest that these loans earn makes up a majority of the income for REITs. The REIT is also able to purchase packages of existing mortgages from banks or other REITs. This allows corporations to buy, sell, and trade huge amounts of mortgages, and the prices of these mortgage packages depend on the credit of the property owner and size of the loan. Similar to purchasing mass amounts of mortgages, REITs can also purchase mortgage-backed securities, which is essentially purchasing pools of mortgages. All three ways produce revenue through collecting on the interest of the loans.

And then there is the hybrid, which is the combination of the Equity REIT and the Mortgage REIT. These REITs hold investments in properties and mortgages.

A few examples of REITs include American Century Investments (ACIVX), Vanguard (VNQ), Boston Properties (BXP).  You can find a list of the top REITs in the NASDAQ using this link: http://www.forbes.com/2008/02/20/reit-perfomance-grades-biz-cx_dp_0220reit_table.html.

Unfortunately, due to the recent economic crisis combined with the massive drop in real estate prices, nearly all of the REITs have taken beatings the past two years and have dropped in share price by an average of 40-70%.

 

Ramin Ghaneeian

College Trillionaire