A real estate investment trust has many estate planning and investment benefits. Experienced Florida real estate lawyers can explain when real estate trusts should be considered, the advantages, and the disadvantages.
According to Investopedia.com, Congress created real estate investment trusts (REITs) in 1960. A REIT allows investors to share the investment in commercial real estate that generates income. REITs are used for apartment buildings, hotels, data centers, hospitals, infrastructure properties, commercial buildings, warehouses, timberland, and other properties.
While REITS are generally used for one type of investment, REITS can invest in multiple types of properties.
Real Estate Investment Trust Guidelines
The Act which created REITs and the Internal Revenue Code does have strict guidelines which investors and people planning their estates should review with their Florida REIT lawyer. Generally, REITs are used for long-term investments that provide shareholder income. Some of the key requirements are:
- The REIT must invest ¾ of its assets in real estate, US Treasuries, or cash
- 75% of the Real Estate Investment Trust income must come from the real property rentals, mortgage interest, or from real estate sales.
- First, nine-tenths of the REIT taxable income should be paid to shareholders in the form of yearly dividends,
- Second, the REIT muse use a taxable corporation,
- Third, a board of trustees must manage the REIT,
- Then, after the first year, the REIT must have at least 100 shareholders,
- Also, there are limits on the total interest five or fewer shareholders can own – the core idea is to spread the investment among many shareholders,
The different types of real estate investment trusts
An equity REIT
Most real estate investment trusts are of this type. An equity REIT buys, manages, and owns real estate that generates income primarily through rentals – and not interest or sales,
A mortgage REIT
Here, the REIT lends funds to the owners of the real estate through mortgages, loans, and /or the purchases of mortgage-backed securities. The REIT generates income based on the mortgage interest minus the cost of funding the loans,
A hybrid REIT
These are essential equity and mortgage REIT combinations.
A publicly traded REIT
Here, the REIT shares are listed on national exchanges where investors can buy and sell them. These REITs must comply with the US SEC (Securities and Exchange Commission) regulations.
A public but Non-Traded REIT
This type of REIT is regulated by the Securities and Exchange Commission even though it is not traded on a national security exchange. The advantage is its stability. The disadvantage is that this type of REIT is tougher to sell.
A private REIT
This type of REIT is not traded through a national exchange and not registered with the SEC
They help with keeping the investment anonymous. Direct investments of real property are generally recorded and a matter of public record. When there are multiple real estate investors, a requirement of the REIT, then - while the investment is normally public – the identity of the individual investors in the REIT is private.
Many single investors cannot afford to buy the investment themselves. A real estate investment trust allows multiple investors to pool their resources so the REIT can proceed. Then, the REIT also helps clarify who owns the investment and in what shares.
Planning an estate
REITs are a tool for helping to avoid, reduce, or postpone the payment of taxes. Generally, the REIT investor transfers their interest in the REIT to their heirs to help avoid death taxes and to keep control of the investment in the hands of their loved ones.
The investments, the shares, are normally easy to trade – either through an exchange or through the private sale (depending on the nature of the real estate investment trust).
They are a nice way for an investor to diversify their investments.
The required dividends should provide consistent cash flow and lower-risk returns.
- There are REIT legal and IRS requirements.
- The Securities and Exchange Commission may regulate the REIT
- Also, there are additional limits on using REITs for estate planning. A Florida REIT estate planning lawyer can explain those limits.
- There are also administrative costs for creating the REIT. Also, there are administrative fees for monitoring and managing the real estate investment trust.
- Only a small percentage of the taxable income can be rolled over into new investments. For example, 90% of the taxable income must go to the shareholders
- Dividend income taxes are normally higher than individual income.
- There is no guarantee that there will be a profit – unlike some investments such as certificates of deposits, some treasury documents, and interest-bearing savings accounts.
Methods of investment
First, investors should, after a financial review, consult with a Florida lawyer who works with REITs – especially if they are also planning their estate. REIT investors often work with brokers and investment advisors as well. Investors can put their funds into a publicly-traded REIT, a REIT mutual fund, or a REIT fund traded through an exchange - by arranging to have their broker buy the shares. The investor typically pays the broker a percentage of the purchase price.
A broker or financial advisor can also help you buy REIT shares that are not traded. REIT investors are also now part of various types of defined-benefit and defined-contribution plans. Many investors own REIT shares indirectly through their retirement benefits or other types of investments.