How to Start a REIT | The Motley Fool

There are respective strategies you can take to investing in real estate. You can buy a one rental property, start a billion-dollar real estate of the realm fund, or choose one of dozens of other methods in between. How you choose to social organization your actual estate occupation depends on your overall goals and the capital and resources you have available. One strategy that ‘s growing in popularity is to raise capital through syndication with a individual offer. however, knowing how to start a real estate investment trust, or REIT, may provide you with an choice that ‘s better suited for your situation .Outdoor office meeting.
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What exactly is a REIT?

A REIT is a real estate investment company that owns or finances investment properties that produce income, distributing earnings to its investors in the class of dividends. In fact, a REIT has to distribute 90 % of its taxable income to its investors.

There are two types of REITs : fairness REITs and mortgage REITs. Equity REITs are what most people are familiar with. They invest in income-producing real estate. mortgage REITs provide financing for real estate a well as buy existing mortgages .

How is a REIT different from crowdfunding?

REITs and crowdfunding may seem like about the same thing. The investors provide capital, the REIT or crowdfunding patron purchases veridical estate, and the investors earn a retort on their investment. One of the main differences, however, is that investors typically are investing in a specific bargain with crowdfunding. The sponsor raises money for that deal, the investors all get a piece of the cash flow, then, once the property is sold, the investment is over. Each deal is a separate transaction. REIT investors, on the early hand, are typically investing in a portfolio of properties. This portfolio will normally change over time as the REIT ‘s management team will dispose of ailing performing properties to invest in properties with a higher reappearance. They besides normally continue to add more real estate assets to their portfolio as more investors purchase shares. An investor ‘s capital is normally tied up for several years when they invest in crowdfunding. The same is normally true with private REITs. however, publicly traded REITs can be bought and sold whenever the investor wants

Why start a REIT?

REITs have more flexibility than equity crowdfunding or real estate syndication. You do n’t have to raise capital for each individual deal and possibly miss out on deals because you ca n’t act quickly adequate. A REIT is an ongoing operation that can move in and out of investments to maximize the render. Investors basically agree to trust you with your asset management abilities to give you more flexibility on how to best use the capital available. With a syndication, you have to sell investors on your vision and plan for each specific investment you want to make. One of the most popular reasons to start a REIT is the tax benefits. A REIT is n’t normally taxed on the trust level. alternatively, the investors are taxed on their dividends. One of the main requirements of a REIT is that they have to pay out at least 90 % of their taxable income as dividends. Notice I said “ taxable. ” Since depreciation is a major noncash expense used as a deduction for taxes, a REIT about always pays out at least 100 % of their taxable income. This leaves money in the REIT that is n’t taxed and can be used for early investments .

How to start a REIT

The Internal Revenue Service ( IRS ) requires you to reach certain thresholds before classifying you as a REIT, and there are specific requirements you must continue to meet. The comply steps are a common scheme investors use to start a private REIT .

Decide what type of REIT you want to form

Unless you ‘re already sitting on a $ 100 million-plus portfolio of real estate, you ‘ll probably be starting out as a private REIT. beyond that, you ‘ll decide whether you ‘re going to form an equity REIT or a mortgage REIT. With fairness REITs, there are several niches that involve different place types. Investors are normally more concerned in these because they know what they ‘re investing in. The assorted types of REITs you could form are :

  • Retail REIT
  • Office REIT
  • Industrial REIT
  • Multifamily REIT
  • Residential REIT
  • Healthcare REIT
  • Hospitality REIT
  • Infrastructure REIT
  • Data center REIT
  • Self-storage REIT
  • Timberlands REIT
  • Specialty REIT

once you have a design for what you want to do, the come steps will take you from idea to REIT condition .

Form a taxable entity

You, along with any partners, must first create a pot that will late become the REIT. Since certain requirements still have to be met, this is much set up as a management party. This is the best time to put a very specific operating agreement in place between you and any partners. This will determine how the company will be managed moving forward.

Draft a Private Placement Memorandum (PPM)

You should get the avail of an lawyer for this part. The PPM will provide very specific details of the ship’s company. Some of them will include :

  • The objective.
  • Profiles of the management team.
  • The company’s financial information.
  • How profits will be distributed.
  • Fees.
  • Rules for how investors can sell their shares.
  • Risks.
  • Agreement between the company and investors.

The private placement memo is what you will be providing to likely investors. Having a clear objective and thorough details will go a retentive way in making investors feel comfortable with your ship’s company .

Find investors

Your caller will need at least 100 investors to be classified as a REIT. You do n’t inevitably need to get all 100 up front, since the IRS only requires you to meet that doorsill by the beginning of the REIT ‘s second base tax year. however, losing your real estate investment trust condition for not having enough investors would be bad for investor relations. Most real estate investment trust startups will get commitments from at least 100 investors before moving ahead. It ‘s important to note that five or fewer investors ca n’t own more than 50 % of the shares in a REIT or it will be taxed as a personal contain ship’s company .

Convert your management company into a REIT

once you ‘re ready to move forward in your REIT startup process, you ‘ll need to change your ship’s company ‘s structure from a management ship’s company to a REIT and amend the security of incorporation you filed. Transitioning the company into a REIT will besides involve filing IRS Form 1120-REIT with the IRS when filing taxes. This is the form that will request the information to verify you meet the criteria to be taxed as a REIT and the phase you will continue to use when charge taxes .

Maintain compliance

Starting a REIT is n’t a one-and-done deal. You must continue to qualify in order to receive the same tax treatment. The ongoing requirements for a REIT are :

  • Pay 90% of the REIT’s taxable income to investors in dividends.
  • At least 75% of the REIT’s assets must be in real estate, or real estate mortgages, quarterly.
  • At least 75% of the REIT’s gross income must come from rental income or mortgage interest.
  • A maximum of 5% of the REIT’s income can be from nonqualifying sources such as service fees or other types of business income.

Of course, this is n’t an across-the-board tilt. The IRS provides a full number of the requirements to be taxed as a REIT .

Taking your REIT public

Taking your REIT populace is the big payday and the opportunity to grow into a multibillion-dollar publicly traded REIT. While some REITs have had an initial public offer ( IPO ) to raise a little as a few million dollars, most wait until their value reaches at least $ 100 million. The time it takes to be able to take your REIT populace will depend a distribute on the measure of capital you were able to raise from investors in the begin and the size of the real number estate investment portfolio you started with. Going public is n’t a simple process, and it ‘s decidedly not a cheap one. There is a set of red videotape, and the initial price is normally several hundred thousand dollars. You besides have the extra expenses once your REIT is public a well as rigorous report requirements. Hassles and expenses apart, it ‘s a capital target to aim for. If you manage your REIT by rights, it ‘s accomplishable .

The bottom line

Starting a individual REIT is an excellent way to raise capital from investors while maintaining the flexibility you need to manage the assets in a way that will allow you to increase everyone ‘s returns. Starting a REIT will besides help you scale the size of your portfolio faster than many early options. Of course, starting a REIT is n’t the best option for every real estate investor. Take a careful attend at your short- and long-run real estate goals to determine if the REIT structure is right for you.

If you have limited experience and cognition, you ‘ll credibly want to start with a few syndication deals to build a successful track read. This will be crucial for attracting investors, specially since they will have to put a lot of reliance in you to manage their REIT investment. Either way, knowing how to start a REIT will help you significantly while creating your roadmap to operating your public REIT .
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