Real Estate Investment Trusts, commonly referred to as REITs, are companies that own and operate or finance real estate assets, with the goal of earning income for their investors. Many REITs are publicly bought and sold on stock exchanges and are therefore liquid investments much like mutual funds. Ownership of a REIT allows an investor to hold a fractional share of a commercial real estate portfolio that may include multi-family housing, hospitality property, retail assets, self-storage centers, industrial facilities, healthcare buildings, and more.
REITs Must Adhere to Rules
While REITs have many options regarding the composition of their portfolios and the type of assets (some REITs invest in property while others purchase mortgages and other related financial instruments), there are specific rules the trust must follow to maintain eligibility as a REIT:
- Invest at least 75% of total assets in real property, cash, or U.S. Treasuries.
- At least ¾ of the REIT income must come from rent, mortgage interest, other real estate-related financial instruments, or the sale of assets.
- The trust must distribute at least 90% of taxable income to shareholders annually.
- The REIT must have a board of trustees.
- The structure must be a corporate, taxable entity.
- The REIT must have a minimum of 100 participants, and ownership cannot be concentrated in the hands of five or fewer shareholders.
Farmland REITs can Focus on Equity, Debt, or Both
As mentioned, REITs typically use their pooled capital to buy assets (whether an apartment building, hotel, or farm) or debt, like mortgages. This protocol is valid for REITs, whether general or focused on a particular sector like farmland. As with other sectors, farmland REITs can also invest in both debt and equity, holding a hybrid portfolio.
One of the advantages of a REIT investment is that the company does not pay federal income taxes at the corporate level if it remains eligible. Instead, the distributions (remember, the REIT must distribute at least 90% of taxable income to the investors, and many distribute more) to the shareholders are taxed as ordinary income. Since that differs from the treatment accorded to many dividends, taxpayers may want to consider holding REIT shares in a retirement account, but everyone should consult their advisor.
Is a Farmland REIT a Good Idea?
Every investment has risks and opportunities. The attraction of a farmland REIT compared to direct ownership of farmland mimics the comparison to fractional ownership of assets in other sectors contrasted with direct investments. The choice of farmland instead of retail, multi-family housing, office properties, or other real estate sectors is one that the investor makes according to their risk appetite, individual preferences, and comfort based on different factors.
Choosing a REIT (whether focused on farmland or another type of real estate) asset may be a straightforward way to accomplish a 1031 exchange for an investor that wants to sell a property and pursue passive income.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. There is no guarantee you will receive any income. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.