Real Estate Investment Trust
A real estate investment trust is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping centers, hotels and commercial forests. Some REITs engage in financing real estate.
Most countries’ laws on REITs entitle a real estate company to pay less in corporation tax and capital gains tax. REITs have been criticised as enabling speculation on housing, and reducing housing affordability, without increasing finance for building.
REITs can be publicly traded on major exchanges, publicly registered but non-listed, or private. The two main types of REITs are equity REITs and mortgage REITs . In November 2014, equity REITs were recognized as a distinct asset class in the Global Industry Classification Standard by S& P Dow Jones Indices and MSCI. The key statistics to examine the financial position and operation of a REIT include net asset value , funds from operations , and adjusted funds from operations .
How To Get Started In Real Estate
If you choose to invest in real estate, follow these five steps to get started:
Understanding The Process Of Starting A Real Estate Investment Company
Starting a real estate investment company can be a fairly simple process, since there are few regulatory requirements to begin. Investing in real estate does not require any particular entity, and some people even begin a real estate investment company simply in their own name as a sole proprietorship. Once you find financing and purchase your first property, you have the beginnings of a real estate investment company.
Of course, no matter how you incorporate, you will face some significant regulatory requirements as soon as you acquire your first property. You will need to pay taxes and insurance on the property, as well as ensure that the property is up to code. You must be careful to consider zoning issues, especially when purchasing commercial properties, since you will have to qualify tenants. Finally, you must be careful to check that you are complying with all state laws related to real estate investment.
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Choose A Business Name
Before you create your entity, determine your company name. Try to keep your company name generic. One of the largest benefits of using a real estate company is for protection, which means it makes sense to avoid using personal details, including your name or initials.
You will also need to confirm the name is available in your filing state. You can look this up in your states business registry. If you plan on having a website, make sure the domain name relating to your business name is available. No one wants to register a company to later find out there is already another well-established larger company online with the same name.
Real Estate Investment Vs Real Estate Trading
Real estate investment companies do two basic things: invest in real estate and trade in real estate. Essentially, real estate investment is a long-term investment wherein you purchase real estate with the intent of keeping properties to rent out, while real estate trading is a short-term investment, wherein you buy a property that needs fixing up and flip it for a higher price soon after. Real estate investment requires a higher initial investment and takes longer to draw more than a residual profit. Real estate trading requires a lower initial investment and offers faster profit, but can be risky if the property doesnt move as expected.
Whether real estate investment vs. real estate trading is better really depends on your market, expertise, and overall investment strategy. Both flipping houses and renting properties can be lucrative options, and both can create major losses, depending on how well you do. Ultimately, both strategies are common in real estate investment companies. You just will have to decide which strategy better suits your companys needs.
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The Best Types Of Real Estate Investments
What are considered the best types of real estate investments? With the U.S. real estate market on the rise, investors are sifting through every available property type to discover which will help them profit. So which sectors and properties are the best moves for investors today? Keep reading to learn more about the best type of real estate investment for you.
What Is A Real Estate Investment Trust
Imagine spending anywhere from $1,000 to $25,000 on REIT shares and in turn getting a new stream of income.
Thats how things work with REITs. REITs are publicly traded or private companies that own, operate, and/or provide financing for real estate and assets that bring in income. The assets included in a REIT might include commercial buildings such as office spaces, hotels, self-storage facilities, warehouses, hospitals, data centers, cell towers, or residential apartment buildings. Its common for REITs to be clustered according to sector or typethink industrial, healthcare, retail, or residential. There are even REITS.
To qualify as a REIT, a company must check off a long list of criteria. This includes paying their shareholders at least 90% of their taxable income each year as dividends. Plus, they must invest at least 75% of all their assets in real estate assets and make at least three-fourths of their gross income from sources that are tied to real estate. The lions share of their gross income has to come from real estate sources and dividends. Last, no more than one-fourth of REITs assets can come from non-qualifying securities or stock in taxable REIT subsidiaries.
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Tier Corporate Structure Real Estate Investors
Real estate has been hot in the GTA for many years. Investors have been looking at Real Estate as a lucrative investment to include in their portfolio. The average investor makes the first time investment personally or through a corporation and acquiring property for rental purposes. When rental properties are held personally, the rent is reported right away on the investors personal tax return. Also, if rental property is held in a corporation, the passive income is taxed at the highest tax rate in Canada. However, there are some strategies and businesses that can be started alongside your real estate investment to help reduce some of the taxes on passive income.
Holding Real Estate in a CorporationHaving a company hold real estate can protect an investor from legal liability as a corporation is a separate legal entity. However, property income or passive income such a rents, royalty, interest, etc. is taxed in a private corporation at the highest tax rate at about 47% right away. This makes holding real estate less appealing in a corporation.
To set up the 3 Tier Corporate Structure, there are essentially 3 Corporations needed at a minimum as follows: 1) Holding Company 2) Property Management Company and 3) Real Estate Companies.
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Reits Are Not Without Risk: Factors Like Location And Lease Terms Can Influence The Risk Level Of A Particular Non
“Covid happened and the market went down 30-40%,” Jhangiani said. “When the market goes down like this, the price of publicly traded REITs will go with it even though the value of the real estate in its portfolio isn’t lower. So if you’re forced to sell, then you’re forced to sell at the bottom.”
But with non-traded REITs, other factors like a tenant’s lease for their commercial property or even whether you’re investing in a finished property or one that’s still in development can influence risk.
“Generally, the shorter the lease term, the higher the risk because you don’t know how long it might take to find a new tenant once one lease is up,” Jhangiani said. “Another big thing that influences risk is if you’re betting on a property that’s still under construction. The risk on this is higher because you won’t have income coming in on that property for the first few years since it’s still under construction.”
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Who Needs A Real Estate Holding Company
A real estate holding company is typically a great choice for short-term and long-term investors. Any real estate investor can benefit from protecting their personal assets from any business liability, and its also smart to keep your real estate income separate from your personal income. Holding companies are relatively inexpensive to start, and the benefits generally outweigh the cost and upkeep to maintain them. Note that you do not need to start an LLC if youre just purchasing a home as your primary residence.
Real Estate Holding Company Example
An example real estate holding company may help illustrate what this business structure would look like. In this example, I want to start Business Holding Company, LLC. After I follow the necessary protocol I decide to purchase an investment property. The property will be owned under Business Holding Company, LLC, with a property manager in charge of operations.
Lets say I purchased an apartment complex before starting Business Holding Company, LLC. In this case study, I now want to move that property into my newly formed LLC. To do so, I would obtain a deed, file the necessary paperwork, and then transfer the property ownership. I would also update any documents that need to reflect the change in ownership, like tenant agreements and leases.
Now, I have two properties operating under Business Holding Company, LLC. The holding companys balance sheet would then reflect the combined operating income, liabilities, and ROI. As an owner, I would be responsible for oversight and support. While this is an oversimplified example, it can serve as an overview of what a real estate holding company might look like.
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Become A Real Estate Agent
Real estate agents are professionals who assist clients in marketing and selling their properties. They also assist the buyers in purchasing properties. Their services include meeting clients, advising them about market conditions, providing guidance through the process of buying or selling properties.
The real estate industry has grown rapidly in the past few years and is likely to grow in the coming years as well. To become a real estate agent, you will need the below skills to perform the task efficiently:
- Administrative work: scheduling appointments, managing the property listing, creating legal documents and contracts
- Research: perform market analysis, search for properties
An average salary of a real estate agent is $50,000 in the US. Every states real estate licensing requirements are different. Based on the state’s requirement, a real estate agent will need to pass the real estate license examination.
A real estate career can be financially rewarding. However, the work requires good management skills, organization skills, customer service, handling complex paperwork and socially promoting yourself.
The pros of becoming a real estate agent include earning extra commission from clients and also setting your own working hours.
Performance Of The Us Real Estate Market
- Housings combined contribution to GDP generally averages between 15% and 18% of the $20.54 trillion total U.S. GDP
- Residential investment accounts for between 3% – 5% of GDP, or over $1 trillion annually
- Consumption of housing services such as gross rents average between 12% – 13% or GDP, or over $2.5 trillion annually
- Value of the U.S. housing market is nearly $37 trillion
- New housing starts in the U.S. reached a seasonally adjusted annual rate of 1,681,000 according to the most recent information from the U.S. Census Bureau
- Single-family resale home sales reached a seasonally-adjusted annual rate of 4.28 million, according to the NAR
- Single-family rental property is much less volatile than stocks and bonds, with rental housing generating historic annual returns of between 10% – 18% over the past 25 years
- Single-family rentals also provide a superior reward/risk ratio of 1.4, compared to less than 0.8 for bonds and 0.5 for stocks
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How To Start A Real Estate Holding Company
Starting a real estate holding company is not as complicated as it may seem. Investors can familiarize themselves with the process and get started today. Here is a step by step guide to starting a real estate investment company:
Choose a business name: First and foremost, you will want to research your states rules on setting up an LLC, such as through this guide provided by the U.S. Small Business Administration. The first step is selecting a business name, which will always be followed by a comma and the letters LLC. Make sure to run a search to make sure that your desired business name is not already taken.
File the Articles of Organization: Once the business name and business address are determined, a document entitled the Articles of Organization must be filed with your states LLC office typically the Secretary of State. The document is often available as a simple, fillable form found on the Secretary of State website, along with submission instructions. Once prepared, the document can be submitted by mail or in-person with a filing fee.
Publish your intent to file: Although required only by a few states, find out whether or not you are required to publish an intent to file through your local newspaper. Otherwise, your LLC is considered officially formed once your Article of Organization are accepted and approved by your Secretary of State.
Are There Other Ways To Invest In Real Estate
Although property investment deals represent the ultimate image of the American Dream, some people are not ready to make the major commitment that a mortgage requires. Also, even applying for a home loan these days is incredibly difficult. Not only have lending standards increased since the last housing crisis and Great Recession, you may find yourself competing with all-cash buyers.
Moreover, even if money isnt the problem, renting out properties to complete strangers can be a stressful affair. For one thing, you never know what issues may arise. Secondly, the litigious nature of contemporary society means that landlords must make absolutely certain that they are acting transparently and within the law. Unfortunately, a misstep can be devastating both financially and reputationally.
Its no wonder, then, that many refuse to deal with the direct approach of housing-related ventures. But before you give up, consider these real estate investment alternatives.
Flipping houses: One of the riskiest categories of real estate investment, the concept of flipping houses, arguably attracts the most attention. A great example is the HGTV reality series Flip or Flop, which follows the exploits of a couple buying homes on discount that require some care and flipping them at a much higher price following a renovation. On successful flips, the profit margin can be astounding. However, the opposite is also true and even the professionals routinely make costly errors.
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How To Start A Real Estate Investment Company
Real estate investment is a growing industry, and many people are curious how to start a real estate investment company and get a share of the unlimited possible returns offered. Unfortunately, many people who start such companies fail as quickly as they start due to a lack of attention to the legal factors at play. If you are considering starting a real estate investment company, a real estate lawyer from the Priori network may be able to help you get started on the right legal footing.
Register Or File Any Other Licenses That May Be Required
Depending on where your business is located, you may be required to apply for a local business license. Some counties and cities will require their own licenses to operate or conduct business. Check with your local municipality to see if this is a requirement. Additionally, if you own investment properties outside the state, additional filing requirements or business licenses may be needed. An experienced accountant can advise if this is necessary.
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How Do Reits Make Money
REITs make money through their properties by either selling or leasing them. Instead of other real estate companies, which develop properties with the goal to sell them, the primary objective of a REIT is to develop properties, run them, and fold them into their own investment portfolio. Should property owned by a REIT appreciate in value, the owners provide shareholders with income in the form of dividends.