Real Estate Investment Trust - REIT

Let’s start with the basics. The letters. REIT:

Real
Estate
Investment
Trust

It’s basically a mini-mutual fund for real estate investments. Think: a chain of old age homes, which might carry a market value of a million bucks each, but which throw off 80 grand a year in net cash profits.

In melding together a whole bunch of old age homes, at least in theory, the volatility of any one home, um...dying, and then affecting the credit worthiness of the entire portfolio of real estate holdings...is lowered.

With scale, a REIT can then borrow money more liquidly, or easily, and it can leverage its legal obligations and meds-buying process, along with volume deals on diapers and dentures, across a much bigger swath of buyers.

REITs have been around a while. Ironically, they came into existence as an extension of the cigar excise tax in 1960, and extend as far in ownership as warehouses, commercial office buildings, shopping malls where piercings happen, and apartment complexes of all shapes and sizes.

To qualify as a REIT, a company must invest at least 75% of its assets in real estate, and/or be holding cash or US treasury bonds with the intent of investing in real estate. It has to receive at least 75% of its gross profits from real estate rentals. It has to pay out at least 90% of its taxable profits as dividends to its shareholders annually.

It has to have at least 100 shareholders, and have its ownership diversified, such that at least half of its ownership shares are held by 5 or more individuals. REITs are publicly available for Joe Schmo to invest in. They tend to pay very high dividend rates, and grow asset values at a modest premium to inflation.

That is, they don’t grow much. So most of their payback to investors is “bond-like”. And...that’s a REIT. Now, keep an eye out for those bulk diaper deals for Grandpa. And good luck, uh...dealing with the bulky diapers...