Alternative Investments

 

One example of an alternative investment is a real estate investment trust

A (“REIT”), generally, is a company that owns – and typically operates – income-producing real estate or real estate-related assets.  REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.  The income-producing real estate assets owned by a REIT may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans.

Most REITs specialize in a single type of real estate – for example, apartment communities.  There are retail REITs, office REITs, residential REITs, healthcare REITs, and industrial REITs, to name a few.  What distinguishes REITs from other real estate companies is that a REIT must acquire and develop its real estate properties primarily to operate them as part of its own investment portfolio, as opposed to reselling those properties after they have been developed.

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.  In addition to paying out at least 90 percent of its taxable income annually in the form of shareholder dividends, a REIT must:

 -Be an entity that would be taxable as a corporation but for its REIT status;

 -Be managed by a board of directors or trustees;

 -Have shares that are fully transferable;

 ·Have a minimum of 100 shareholders after its first year as a REIT;

 ·Have no more than 50 percent of its shares held by five or fewer individuals during the last half of  the taxable year;

 -Invest at least 75 percent of its total assets in real estate assets and cash;

-Derive at least 75 percent of its gross income from real estate related sources, including rents from real property and interest on mortgages financing real property;

-Derive at least 95 percent of its gross income from such real estate sources and dividends or interest from any source; and

-Have no more than 25 percent of its assets consist of non-qualifying securities or stock in taxable REIT subsidiaries.

REITs generally fall into three categories:  equity REITs, mortgage REITs, and hybrid REITs.  Most REITs are equity REITs.  Equity REITs typically own and operate income-producing real estate.  Mortgage REITs, on the other hand, provide money to real estate owners and operators either directly in the form of mortgages or other types of real estate loans, or indirectly through the acquisition of mortgage-backed securities.  Mortgage REITs tend to be more leveraged (that is, they use a lot of borrowed capital) than equity REITs.  In addition, many mortgage REITs manage their interest rate and credit risks through the use of derivatives and other hedging techniques.  You should understand the risks of these strategies before deciding to invest in these types of REITs.  Hybrid REITs generally are companies that use the investment strategies of both equity REITs and mortgageREITs.

Complete definition of REITs can be found at http://www.sec.gov/answers/reits.htm

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