Are real estate investment trusts a good career path in 2022?
Since real estate is such a diverse industry, it provides plenty of opportunities for professionals. Once upon a time, a career as a real estate agent was considered the sole viable option, but times have changed, and many people may now make a very good livelihood by investing in real estate. Is working for a REIT (a type of real estate investment trust) a promising profession?
What Are REITs?
A real estate investment trust (REIT) is a business that makes money through the ownership, management, or financing of real estate. Real estate investment trusts (REITs) are like mutual funds, aggregating money from many different people. This paves the way for ordinary people to profit from real estate investments in the form of dividends without personally acquiring, managing, or financing the properties in question.
Individuals can engage in large-scale, income-generating real estate through REITs. One definition of a REIT is an organization that holds interests in income-generating real estate or other assets. The term “real estate” can refer to anything from an office building to a retail center, an apartment complex, a hotel, a self-storage unit, and a warehouse. A real estate investment trust (REIT) is not involved in the construction or acquisition of properties to resell them. Instead, a REIT acquires and develops properties for its portfolio, which it then operates.
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History of REITs
Real Estate Investment Trusts (REITs) started with the Real Estate Investment Trust Act of 1960, which was signed into law by US President Dwight D. Eisenhower. To bring investment into the real estate market, the congressional proponents of the 1960 law looked to the mutual fund business as a successful model. The equity REIT structure was intended to function like a “mutual fund” for real estate investments. Those who lack the financial resources to invest directly in real estate can still get a piece of the action by purchasing shares in an equity REIT.
American Realty Trust was the first REIT. It was created in 1961 by Thomas J. Broyhill, a relative of Virginia U.S. Congressman Joel Broyhill, who advocated for its creation under the Eisenhower administration.
Types of REITs
There are three types of REITs which are:
Equity REITs are real estate businesses that own or manage income-generating facilities like offices, retail malls, and residential complexes and then lease out those spaces to others. Equity REITs distribute the vast majority of their annual earnings to shareholders in the form of dividends after deducting all operational costs related to their holdings. Revenue from the sale of assets is another source of earnings for equity REITs. They are among the most popular ones. Equity REITs are subdivided into eight industries (based on the type of property involved) which are listed below;
- Diversified REITs – including businesses with interests in at least two real estate types (one such company has commercial and residential interests).
- Industrial REITs – businesses that invest in and operate industrial buildings such as warehouses and distribution locations.
- Hotel & Resort REITs – businesses involved in the hotel and resort industry (buying, building, owning, leasing, and managing).
- Office REITs – businesses that specialize in commercial office space acquisition, development, ownership, leasing, and management
- Health Care REITs – including medical properties such as hospitals, nursing homes, and assisted living centers
- Retail REITs – consisting of businesses engaged in retail property acquisition, construction, ownership, leasing, and management
- Residential REITs – consisting of businesses involved in the buying, building, owning, leasing, and managing of houses, apartments, mobile homes, and dorms for students
- Specialized REITs – consisting of businesses not included elsewhere in this list, this sector is responsible for the acquisition, development, ownership, leasing, and management of various real estate types.
Mortgage REITs provide capital to owners and operators of real estate either directly through mortgages and loans or indirectly through purchasing securities backed by mortgages. The difference between their interest on mortgage loans and the cost of funding, or the net interest margin, drives their profits. They could be sensitive to rising interest rates because of this model.
Hybrid REITs have both equity and mortgage holdings. Investors may find more diversification in REITs that offer residential and commercial properties, as opposed to REITs that specialize in either office or retail real estate.
According to how shares of REITs are acquired and held, they can be further categorized as follows:
Private REITs are real estate investment vehicles that are not required to be registered with the SEC and do not have publicly traded shares. Only institutions can buy shares in private REITs.
Publicly traded REITs
Shares of publicly traded REITs are typically traded on the National Securities Exchange and are subject to SEBI oversight. These stocks are listed on NSE, where individual investors may buy and sell them.
Public Non-traded REITs
These REITs are registered with the SEC but do not trade on national stock markets. The liquidity alternatives available to companies can take many forms, such as share repurchase plans and secondary market transactions, but are typically somewhat constrained.
How REITs work
Here is how a typical real estate investment trust is set up:
- The REIT uses the proceeds from its initial public offering (IPO) to acquire a portfolio of properties.
- Thereafter, leasing agreements provide renters with access to these buildings.
- Income is distributed back to investors who own units (which are similar to dividends)
Profits from most REITs will be reduced by annual expenses such as the REIT manager’s fee, the property manager’s fee, the trustee’s fee, and other expenses. Property held by some REITs may be liable to taxation in the jurisdiction where those properties are located. Prospectuses and financial statements provided to investors by REITs contain details on these costs.
A corporation must satisfy the following requirements to be classified as a REIT:
- Real estate must account for at least 75% of the company’s total assets.
- A majority of the business’s cash flow must originate from real estate-related activities, such as mortgage interest, property sales, and rental income, totaling at least 75% of total gross revenue.
- For tax purposes, the business must be organized as a corporation and overseen by a board of directors or trustees.
- At least 100 persons must own stock, and no more than five people can own more than half of the company’s stock.
- The annual taxable income of a REIT must be distributed to shareholders in the form of dividends at a rate of at least 90%.
If a firm meets these requirements, it may (but is not required to) choose to be taxed as a real estate investment trust. The company may thus potentially avoid paying any federal income taxes and pay out huge dividends.
Are real estate investment trusts a good career path?
A career with a REIT provides an opportunity to use your corporate finance and real estate skills. Real estate investment trusts (REITs) can be rewarding careers for those interested in real estate and finance and are prepared to put in the time and effort to learn the ropes. Before making a call, find out as much as possible about your alternatives. REITs offer jobs like property management, asset management, development, and acquisition, just to name a few. These jobs pay between $49,000 and $100,000 per year. Consider your possibilities for a financial future, including real estate vocations. You’ll be able to zero in on the ideal job path by exploring several possibilities within the scope of your interests.
In conclusion, investing in real estate has always been a popular way for people to get their feet wet in the world of investing and make a nice passive income. You’ll be ahead of the game if you’re interested in real estate and the financial industry. Your dream job and a promising career path in this field depend on whether your abilities and aspirations mesh with the industry.