All You Need To Know About A Real Estate Investment Company

Real estate investment companies, known as RIETs or Real Estate Investment Trusts, are corporations that invest in real estate. The purpose of their existence is to acquire and profit from real estate investments. The biggest benefit for RIETs comes through statutory relief by way of reduction or elimination of corporate income tax. However, for this benefit RIETs have to distribute 90% of their annual taxable income excluding capital gains to their investor shareholders. This income may be taxable in the hands of the investor depending on the individual situation of the investor. To save tax the investor can hold real estate investments in his retirement account.

RIETs must also ensure that 75% of their assets are invested in real estate, equity in other RIETs, mortgage loans, government securities or cash. Out of the total gross income RIETs must derive a minimum of 75% from gains through sale of real estate, rents and mortgage interest. RIETs are required to have a minimum of 100 shareholders and less than 50% of outstanding shares should be held by five or less than five shareholders.

These companies can be either public companies or can be held privately.

Apart from tax benefits RIETs allow investors the advantages of professional management of real estate business including rental property. This is done by experts in the real estate field who are well versed with the functioning of the industry. With in-depth business understanding they are able to quickly decide how to take advantage of available opportunities and raise funds through capital markets if required.

Classification RIETs will place them basically in three categories of equity, mortgage or hybrid RIETs.

Equity RIETs are corporate entities whose activities include acquisition, building, renovation, management and sale of real estate. They specialize in ownership of specific building types like apartments, office buildings, regional malls, lodging facilities etc. They buy, own and manage real estate that is income producing. They develop and operate real estate as part of their portfolios not specifically targeting resale. They offer investors better avenues of long term investing as their dividend earnings are derived both from rental income and capital gains from real estate sales as well.

Mortgage RIETs on the other hand specialize in underwriting, acquisition and holding of debt obligations secured by real property. They essentially constitute loan portfolios as opposed to ownership of real estate and form less than 10% of RIETs. They are basically finance companies which use a number of hedging instruments for managing their interest rates and provide money loans to real estate owners for mortgages. They also buy current mortgages and securities backed by mortgages. The primary source of their revenues is the interest generated on mortgage loans. As their earnings are largely based on mortgage interest, these RIETs react faster to interest rate fluctuations that Equity RIETs. When there are chances of a drop in interest rates Mortgage RIETs offer a good chance of making speculative investment.

Hybrid RIETs are a combination of Equity RIETs and Mortgage RIETs. They own real estate property and also provide loans to real estate owners and operators to earn income in a combination of rental income and mortgage interest.

RIETs can be closed ended or open ended. Closed ended RIETs are allowed to issue shares on their own only once; additional shares can be issued only on approval by shareholders. Open-ended RIETs can issue and redeem shares as required by them at any time.

Title: Real Estate Investment Company

Written by: John Lall

Date Written: 0/28/2008

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