A REIT, or Real Estate Investment Trust, is a unique corporation that directly invests in real estate, either through properties or mortgages, and is then sold as a security. Unlike traditional corporations, REITs are exempt from paying corporate income taxes as long as they adhere to specific rules and restrictions. One of these requirements is that at least 90 percent of the REIT’s taxable income must be distributed to shareholders annually in the form of dividends. This allows the REIT to avoid double taxation, as the dividends are only taxed at the investor level.
To raise capital, REITs typically aim to secure 1-2 billion dollars and gradually build a diverse portfolio of properties over several years. The primary objective is for these properties to generate rental income, ensuring a steady stream of revenue for the REIT. However, the success of a REIT depends on various factors, including the performance of the properties within the portfolio and the overall trends in the real estate market.
There are two ways in which REITs can be offered to investors. Private placement investments are exclusively available to accredited investors, while publicly traded REITs are accessible to the general public. It’s important to note that investments through Cornerstone are considered illiquid, meaning they cannot be easily converted to cash. Although the ultimate goal for many REITs is to go public through an initial public offering or be acquired by a larger REIT, these outcomes are uncertain and rely heavily on the performance of the properties within the REIT and the overall real estate market.
There are different types of REITs, each with its own investment strategy. Equity REITs primarily invest in and own properties, generating revenue from rental income. Mortgage REITs, on the other hand, focus on investing in property mortgages. They either loan money for mortgages to real estate owners or purchase existing mortgages or mortgage-backed securities, earning revenue primarily from the interest on these loans. Hybrid REITs combine the strategies of both equity and mortgage REITs by investing in both properties and mortgages.