How Does a REIT Generate Income?

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Real Estate

Like any corporation, REITs require capital to operate. Publicly traded REITs generate capital through IPOs, which are like selling stocks to investors who are interested in investing in the corporation’s real estate that generates income. The people who buy IPOs invest in real estate that is managed like a stock portfolio. These external funds enable the REIT to purchase, develop, and manage real estate for profit. REITs make money by renting, leasing, or selling properties they acquire. The shareholders elect a board of directors, who are responsible for making investment decisions and hiring a management team to oversee the properties.

FFO, or funds from operations, is the typical way to measure REIT profits. According to the National Association of Real Estate Investment Trusts (NAREIT), FFO is calculated by taking net income from rent and/or sales of properties and subtracting administrative and financing costs. Net income is determined by GAAP, or generally accepted accounting principles. However, GAAP calculations assume that assets depreciate predictably, which is not the case with real estate. As a result, FFO does not include depreciation in net income.

Investors who want an accurate measure of a REIT’s FFO should look to other sources, such as quarterly reports and supplemental information. The formula for measuring a REIT’s operating cash flow based on net income calculated according to GAAP may not always be accurate. The true measure of a REIT’s FFO should also account for repairs, maintenance, and other costs.

Originally Published: Mar 16, 2011

REITs FAQ

What is a REIT stock?

A REIT, or real estate investment trust, is a company that owns income-producing real estate or finances them across different property sectors. Investors benefit from the stock exchanges carried out by REITs.

Is a REIT a good investment?

REITs are a great investment that can help diversify investors’ portfolios outside of the stock market.

What are the best REITs to invest in?

Kiplinger’s Investing Outlook, Iron Mountain, and Digital Realty Trust are among the best REITs on the market.

Can you lose money in a REIT?

Investors can lose money in a REIT if interest rates rise, causing investment capital to shift into bonds.

How many REITs are there?

There are approximately 1,100 registered U.S. REITs that have filed tax returns.

FAQ

1. What is a REIT?

A REIT (Real Estate Investment Trust) is a company that owns, operates or finances income-generating real estate properties. It is a way for investors to pool their money together and invest in a diversified portfolio of properties, without having to manage the properties themselves.

2. How does a REIT make money?

A REIT makes money through rental income, capital appreciation of properties, and interest income from mortgages and other financial instruments. As a publicly-traded company, a REIT must distribute at least 90% of its taxable income to shareholders in the form of dividends, which is another way that investors can earn money from a REIT.

3. What types of properties do REITs invest in?

REITs can invest in a variety of properties, including commercial office buildings, shopping centers, apartment complexes, warehouses, and even timberland or data centers. The type of properties a REIT invests in will depend on its investment strategy and target market.

4. How are REITs different from other real estate investments?

REITs are different from other real estate investments because they are publicly-traded companies that can be bought and sold on stock exchanges. This provides investors with liquidity and allows them to easily invest in a diversified portfolio of properties without having to manage them themselves.

5. How are REITs taxed?

REITs are not taxed at the corporate level if they meet certain requirements, such as distributing at least 90% of their taxable income to shareholders as dividends. This makes REITs a tax-efficient investment for investors who are looking for regular income.

6. Are there risks involved in investing in REITs?

Like any investment, there are risks involved in investing in REITs. One risk is the possibility of a downturn in the real estate market, which could lead to lower rental income and property values. Additionally, interest rate fluctuations and changes in government regulations can also impact the performance of REITs.

7. What should I consider before investing in a REIT?

Before investing in a REIT, you should consider the investment strategy of the company, the types of properties it invests in, and its track record of performance. It’s also important to consider the fees and expenses associated with investing in a REIT, as well as any potential risks.

8. Can I invest in a REIT through my retirement account?

Yes, you can invest in a REIT through your retirement account, such as an IRA or 401(k). This can provide tax benefits and allow you to diversify your retirement portfolio with income-generating real estate investments.

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