Introduction to Real Estate Investment Trust (REITs)

Since lots of people not sure what is REITS, I would like to share what is actually it is..
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What is a REIT?

A real estate investment trust, or REIT, is a company that owns, and in most cases, operates income-producing real estate. Some REITs also engage in financing real estate. The shares of many REITs are traded on major stock exchanges. (In Malaysia - Bursa Malaysia). As pass-through entities, whose main function is to pass profits on to investors, a REIT's business activities are generally restricted to generation of property rental income. Another major advantage of REIT investment is its liquidity (ease of liquidation of assets into cash), as compared to traditional private real estate ownership which are not very easy to liquidate. One reason for the liquid nature of REIT investments is that its shares are primarily traded on major exchanges, making it easier to buy and sell REIT assets/shares than to buy and sell properties in private markets.

REITs are classified in the following categories:
• Equity REITs own and operate income-producing real estate.
• Mortgage REITs lend money directly to real estate owners and their operators, or
indirectly through acquisition of loans or mortgage-backed securities.
• Hybrid REITs are companies that both own properties and make loans to owners and
operators.

To qualify as a REIT, a company must have most of its assets and income tied to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs historically remit at least 100 percent of their taxable income to their shareholders and therefore owe no corporate tax. Taxes are paid by shareholders on the dividends received and any capital gains. Most states honor this federal treatment and also do not require REITs to pay state income tax. Like other businesses, but unlike partnerships, a REIT cannot pass any tax losses through to its investors.