Real Estate Investment Trust Definition
A real estate investment trust, or REIT for short, is a business entity—such as a corporation or trust—set up to invest strictly in income-producing real estate. The advantage of this structure is the elimination of corporate income tax. Instead, 90% of the income generated by the real estate investment trust is distributed to its shareholders, who in turn pay any taxes due based on their individual situation. This is a special arrangement, with the REIT being known as “pass-through” entity for taxation purposes.
Like any corporate entity or association, a real estate investment trust has a board or trustee(s) which overseas its operations and makes decisions as to the direction its business will take. In order to maintain its special “pass-through” privileges, it must make the majority of its income from the earnings generated by its real estate holdings. Some of these corporations also finance real estate, especially by lending “hard money,” which are high-interest rate, higher risk loans. Most real estate investment trusts also manage the properties they own, although some choose to hire outside management companies to take care of their properties.
As you can imagine, there are several real-world benefits to setting up a real estate investment trust and buying and selling real estate through that vehicle instead of under an individual’s name. By putting their assets in a real estate trust, individual shareholders can be shielded from personal liability to a greater degree, protecting personal assets should something go wrong and a lawsuit ensue. Finally, should an investor wish to offload his real estate stake, rather than go through the arduous and lengthy process of listing and marketing a property through a real estate broker, a REIT stakeholder can simply sell his or her shares and cash out that way.
One last important note: real estate investment trusts are not limited to commercial properties such as office buildings, multifamily residences, or shopping malls. By definition, even a single family house that is rented out is a commercial property. That means that savvy REITs shareholders could be picking up distressed residential properties in choice neighborhoods for pennies on the dollar, and hold for appreciation and income while shielding their personal assets from lawsuits. Not a bad deal!