Yesterday we warmed up all of our readers for our REIT miniseries by taking a quick look at them and finding out just what exactly, REITs are really all about.
In our post yesterday we talked about how REIT stands for “real estate investment trust,” leaving many thinking that it’s a trust fund; but it’s not really. When most people think of a trust fund, they think of some kind of investment or savings account in which funds are put away for a certain amount of time, and are to be withdrawn once that time is up. But one of the biggest differences between a trust fund and a REIT are the liquidity of them. While trust funds are locked in until a certain time, a REIT has a very high liquidity and can be turned in and sold for cash at any time the investor wishes.
There’s another – really huge – way that REITs differ from trust funds. In fact, this difference is so huge that some have questioned before whether REITs should really even be called trusts or not. That’s because, despite its name, REITs are not actually trust funds. In fact, they’re corporations, and when you buy a REIT, it’s shares in these companies that you’re buying. These corporations are what’s actually known as the REIT, because they must apply for REIT status before they can trade on the stock market. Not just any corporation can apply for REIT status though; first they must meet a few requirements.
The first requirement for a corporation to be eligible for REIT status is that it must hold at least 75% of its assets in real estate; and 75% or more of the corporations profits must come in the form of rent payments or mortgage interest. In addition to that, 90% of the taxable profits the corporation makes in a year must be paid out as dividends to investors. While that percentage sounds like a whole lot of profit going to shareholders, that profit is non-taxable, and so the corporation benefits by not paying so much in taxes.
Once the company has REIT status, it’s really just a matter of investing in them and seeing how the real estate the corporation owns does in the market. Rental incomes and mortgage interest rates, just like any other kind of investment, fluctuate and move up and down. And so when you invest in a REIT, your money will move up and down, depending on how much income the corporation makes from those investment properties.
REITs are fairly new in the Canadian investment world. They may even be newer than the concept of flipping (buying property yourself cheap, fixing it up, and reselling it) or using home equity on one property to help finance another. REITs have only been around in Canada since 1993, decades after many countries like the United States began using them as investment tools. It was however during this time that REITs became hugely popular around the world, giving corporations another way to enjoy huge tax savings, and giving investors a chance to invest in the sound investment of real estate, without doing all the work involved, and still while being able to enjoy great liquidity.
