Real Estate Investment Trusts (REITs): An Overview of Profitable Portfolio Diversification


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Engaging in Real Estate Through a Real Estate Investment Trust

Dive into the world of Real Estate Investment Trusts (REITs) with Perigon Legal Services. Learn how REITs work, their benefits, legal considerations, and how we can assist you in navigating this investment landscape.

Author: Stan Faulkner, Founder, Perigon Legal Services, LLC

Mr. Faulkner is an experienced counselor and litigator with 15 years of experience, having held bar licenses in four states (Mo, Il, Ct and Ga). Stan Faulkner uses this experience and focuses his skills in the pursuit of assisting individuals in probate (trust and estate) matters, guardianships and conservatorships, estate planning, business disputes and contract disputes. Published on May 17, 2024.

Imagine turning the key to a portfolio of diversified real estate assets; that’s precisely what Real Estate Investment Trusts (REITs) allow everyday investors to do. These trusts provide individuals with a slice of income-generating properties that might otherwise be beyond their reach. But what exactly are they, and what potential do they hold for your investment strategy?

These entities enable participation in a range of real estate sectors—from towering office buildings to bustling shopping centers to serene healthcare facilities—without the complexities of direct property ownership. As we delve deeper into the world of REITs, it’s crucial to understand not just the rewards but also the unique risks and considerations intrinsic to this type of investment. 

We at Perigon Legal Services are here not just to enlighten you on the broader strokes of REITs but also to help you navigate the finer nuances that could impact your portfolio. With an understanding of investment landscapes, our insights shed light on how to integrate REITs into a well-rounded financial plan.

    What Are Real Estate Investment Trusts (REITs)?

    Have you ever pondered the expansive nature of income-generating real estate? These are the assets that form the backbone of cities and working economies. REITs provide a way for individuals to invest in a variety of income-producing properties without having to directly purchase or manage the property themselves. A REIT is a company that owns, finances, or operates real estate that produces income. 

    Here’s a brief overview:

    • Ownership: They typically own and manage a portfolio of real estate properties.
    • Operation: Day-to-day management of the properties is often handled by the REIT, ensuring that they are leased out and that the buildings are maintained and managed professionally.
    • Financing: They also finance real estate by providing funding to real estate investors and managing the associated mortgage loans. 

    What makes REITs particularly attractive? One key aspect is that they must annually distribute at least ninety percent of their taxable income in the form of shareholder dividends. This requirement often leads to steady and potentially attractive income for investors. They must also derive seventy-five percent or more of their gross income from real estate-related sources. This includes rents from real property and interest on mortgages financing real property.

    Investing in REITs can provide diversification to an investment portfolio because real estate often moves counter to the trends of other types of securities. Additionally, REITs can be an accessible way for average investors to benefit from the long-term potential of real estate investments. 

    Getting Started With REITs

    REITs allow participation in portfolios of income-generating properties right from your brokerage account. But where do you begin?

    Understanding REITs

    REITs can be categorized into:

    1. Equity REITs: Own and operate income-generating real estate. 
    2. Mortgage REITs: Provides funding for real estate by purchasing or originating mortgages and mortgage-backed securities. 
    3. Hybrid REITs: Combines equity and mortgage REITs, offering a mix of the services provided by both.

    It’s imperative to choose the type that aligns with your investment goals and familiarize yourself with the sector by consulting comprehensive guides. REITs come with their own unique risks and benefits, and you need to assess your risk tolerance. Additionally, defining your investment objectives can help you determine if you are seeking income, growth, or a combination of both.

    Choosing the Right REIT

    With a foundational understanding in place, consider factors like:

    • The REIT’s focus, whether commercial, residential, healthcare, etc.
    • Market trends impacting specific sectors of real estate.
    • Publicly traded REITs vs. non-traded or private REITs—each comes with different liquidity levels and risk factors.

    Legal Considerations for REIT Investors

    Investing in REITs has its own set of legal considerations that every investor should evaluate. The Securities and Exchange Commission (SEC) plays a significant role in overseeing these investment vehicles, as compliance with securities laws is paramount. Regulations are in place to protect investors, and understanding these rules helps in making informed decisions.

    One crucial aspect to consider is the fiduciary duties of REIT managers. These duties include the obligation to act in the best interests of the investors and to manage the properties with due diligence. Learn more about fiduciary duty in real estate to understand the legal responsibilities involved.

    Tax implications are another key area. REITs offer certain tax advantages, but it’s essential to comprehend how they affect your taxable income. Different types of REITs may have varied tax treatments, and staying apprised of the latest tax laws is beneficial for financial planning.

    The challenges and risks associated with REITs cannot be overlooked. We must consider market risks, economic factors, and legal or regulatory changes that could impact REIT performance. Mitigating risks involves due diligence and often seeking professional advice. By receiving proper guidance, you can make more prudent investment choices that align with your risk tolerance and investment goals.

    Perigon Legal Services: Your Partner in REIT Investments

    The complexities of Real Estate Investment Trusts (REITs) might seem daunting, but that’s where we come in. At Perigon Legal Services, we practice simplifying the intricate structures of REIT investments for our clients, offering them a gateway to include tangible, income-generating assets in their portfolios without the direct headaches of property management.

    Our services include:

    • Providing legal advice for REIT formation and compliance
    • Providing support in navigating the legal terrain of REITs
    • Offering tailored consultation for individual investment goals

    With a focus on personalized legal guidance, we ensure that our clients’ investments are not only sound but also in line with the latest regulatory standards. We understand that investment in REITs should align with your financial horizon, and we strive to position your interests front and center in this dynamic market segment.

    Why Choose Us?

    Choosing Perigon Legal Services means:

    1. Gaining an ally who prioritizes your investment goals
    2. Obtaining clarity on complex real estate laws and regulations
    3. Receiving informed advice on the structure and distribution of investment returns

    Are you wondering if real estate agents give legal advice and why you can’t just go to them for advice? Although real estate agents are familiar with buying and selling property, they cannot give you legal advice. It’s crucial to make informed decisions based on legal precedence and current laws, which is why professional legal counsel is indispensable. 

    Contact Us for Further Guidance on REITs

    REITs are unique financial vehicles that offer investors a pathway to engage with the real estate market through a company that owns and typically manages income-producing real estate. Investing in REITs carries its own set of complexities, and understanding these can significantly impact your investment decisions. 

    It’s not merely about choosing an investment but comprehending the subtle nuances that influence REIT performance, such as the types of owned assets and the economic forces at play. We at Perigon Legal Services recognize the importance of making informed decisions. 

    Our team can guide you through the various facets of REITs, helping you to understand how they fit into your personal investment portfolio. Contact us today, and let us help you explore your REIT investment opportunities.

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