Real Estate Investment Trusts

Structuring Commercial Deals with REITs (Real Estate Investment Trusts)

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REITs, or Real Estate Investment Trusts, are a convenient way to invest in real estate without having to buy properties yourself. These types of trusts collect money from multiple investors to purchase and manage real estate assets. This means you can own a share of commercial properties like office buildings or shopping centers by buying REIT shares, similar to buying stocks. This method is less risky and simpler than directly owning property.

Types of REITs

There are three main types of REITs that may help you buy commercial real estate:

  • Equity REITs: These are the most common form of REIT. These types of trusts own and manage various properties, including office buildings, apartments, and shopping centers. The money they make mainly comes from renting out these spaces to tenants.
  • Mortgage REITs: These REITs don’t own properties—instead, they lend money to real estate owners or buy existing mortgages. Earnings come from the interest on these loans.
  • Hybrid REITs: Hybrid REITs combine features of equity and mortgage REITs. They invest in properties and also provide real estate loans, giving investors a mix of income sources.

How REITs Work in Commercial Deals

REITs play a substantial role in commercial real estate deals by combining funds from many investors. This allows people to invest in real estate without having to buy or manage properties themselves; for buyers, they can get the funding they need without needing one single lender or owner with that amount of money on hand. When you buy shares in a REIT, your money is pooled with money from other investors. The REIT then uses these combined funds to purchase properties like office buildings or shopping centers.

By doing this, REITs give investors access to a variety of commercial properties, making it easier to diversify their investments. The REIT takes care of all the day-to-day management, allowing buyers the benefits of an investment without the work.

Benefits of Using REITs

REITs have several advantages. One of the main benefits is diversification. Since REITs invest in different types of properties, you can spread your risk across multiple assets. This helps protect your investment if one property type underperforms. As an example, consider office buildings in the wake of the COVID pandemic—if someone had all of their investment money in office buildings and 90% of the country was suddenly working remotely, their income would tank. A more diversified portfolio prevents that outcome.

Another benefit is liquidity. Unlike owning physical property, which can take a long time to sell, you can buy and sell REIT shares quickly on major stock exchanges.

Additionally, REITs must pay no less than 90% of their taxable income in the form of dividends. This means you can receive regular income from your investment. Finally, REITs offer tax advantages. Because they distribute most of their income to shareholders, they avoid paying corporate income taxes, which can result in higher dividends for you.

Legal Considerations

If you invest in REITs, you must know your legal rights and obligations. REIT laws make sure the REIT operates properly and protects investors’ interests. These trusts must pass certain tests related to their assets and income.

Because these rules can be complicated, it’s a good idea to talk to a lawyer who knows about real estate investments. Your attorney can explain what’s required and make sure everything is done correctly.

On top of that, these trusts must follow both federal and Maryland state laws. These laws can change, so it’s important to stay updated. While you can technically stay abreast of these changes on your own, that can be incredibly difficult for an investor without legal experience. A lawyer can provide much-needed insight.

Risks and Challenges

Investing comes with its own set of risks, just like any other investment. The value of your investment can change with market conditions, affecting property values and REIT share prices. If interest rates go up, mortgage REITs may struggle because they often borrow money to fund their investments.

To handle these risks, it’s important to spread your investments across different types of REITs and know how much risk you’re willing to take. Researching the management team and their past performance can also provide insight into how well they manage their assets.