5/6/24, 8:53 PM An Inside Look at Real Estate Investment Trusts (REITs): Formation, Income Distribution, and Investment Allocation

An Inside Look at Real Estate Investment

Trusts (REITs): Formation, Income
Distribution, and Investment Allocation
Jeff Sage BS-CM MS-XRCM + Follow
Real Estate Specialist with 30+ Years of Investment and Development
Published Mar 11, 2024

The allure of real estate investment lies not only in the tangibility of assets but also in
the robust income streams they can provide. For many investors, direct property
ownership may seem out of reach. That’s where Real Estate Investment Trusts (REITs)
come in, offering a gateway to real estate markets without the complexities of direct
property management. This article delves into the formation of REITs, the legal
requirements for income distribution, and the typical avenues for investment within
these trusts.
https://www.linkedin.com/pulse/inside-look-real-estate-investment-trusts-reits-sage-bs-cm-ms-xrcm-y1duc 1/7
5/6/24, 8:53 PM An Inside Look at Real Estate Investment Trusts (REITs): Formation, Income Distribution, and Investment Allocation

The Formation of REITs

A REIT is a company that owns, operates, or finances income-generating real estate.

The process of forming a REIT involves several crucial steps:

Business Plan and Legal Structure: An initial business plan is developed, outlining the
strategy, target assets, and structure of the REIT. This is typically followed by the
creation of a legal entity, which can be a corporation, trust, or association.

Registration and Compliance: REITs must register with the Securities and Exchange
Commission (SEC) if they are publicly traded. They must adhere to rigorous compliance
and reporting standards, just like other public companies.

Capital Acquisition: The REIT raises capital through the sale of shares to investors. This
can be done via an Initial Public Offering (IPO) for publicly-traded REITs or through
private placements for non-traded REITs.

Articles People Learning Jobs Get the app

Recommended next reads

Real Estate Investment Trusts (REITs): Unlocking the…

Mason Luke · 7 months ago

Introduction of Real Estate Investment Trusts (REITs)

Articles Network · 3 years ago

https://www.linkedin.com/pulse/inside-look-real-estate-investment-trusts-reits-sage-bs-cm-ms-xrcm-y1duc 2/7
5/6/24, 8:53 PM An Inside Look at Real Estate Investment Trusts (REITs): Formation, Income Distribution, and Investment Allocation

Know about REITs (Real Estate Investment Trusts).

Sainyam Gupta · 1 year ago

Property Acquisition: Once capital is raised, the REIT uses the funds to acquire a
portfolio of properties or mortgages, depending on its focus.

Management: A team of real estate professionals is employed to manage the REIT's

assets, dealing
Like
with property
Comment
acquisition, management, and disposition.
Share 2

Income Distribution Requirements

One of the most attractive features of REITs is their income distribution model. By law,
REITs must distribute at least 90% of their taxable income to shareholders annually in
the form of dividends. This requirement ensures a steady stream of income for
investors and aligns with the primary purpose of REITs—to provide an investment
structure that generates regular income. These distributions are usually made on a
quarterly basis, allowing investors to earn consistent dividends from their investment in
real estate assets.

The high dividend payout requirement also confers a significant tax advantage: REITs
are generally not subject to corporate income tax on the profits that they distribute,
avoiding double taxation and allowing more income to flow through to shareholders.

Investment Allocation: Where the Funds Go

The capital that a REIT holds is strategically invested into a variety of real estate assets.
The allocation of funds typically falls into several categories:

1. Retail Properties: Shopping centers, malls, and standalone stores that generate income
primarily through leasing space to retailers.

https://www.linkedin.com/pulse/inside-look-real-estate-investment-trusts-reits-sage-bs-cm-ms-xrcm-y1duc 3/7
5/6/24, 8:53 PM An Inside Look at Real Estate Investment Trusts (REITs): Formation, Income Distribution, and Investment Allocation

2. Residential Properties: Apartment complexes, housing developments, and sometimes

single-family homes.

3. Healthcare Facilities: Hospitals, nursing homes, and medical office buildings, often
characterized by long-term leases and stable cash flows.

4. Office Buildings: High-rise, mid-rise, and suburban office parks catering to various business
tenants.

5. Industrial Facilities: Warehouses and distribution centers, which have seen a surge in
demand with the growth of e-commerce.

6. Hospitality Properties: Hotels and resorts, which can be riskier investments due to their
sensitivity to economic cycles.

7. Mortgages and Loans: Some REITs specialize in financing real estate by investing in
mortgages or providing loans to property owners.

8. Specialty Properties: This includes unique property types like data centers, cell towers, and
storage facilities.

REITs present a unique investment structure, offering exposure to the real estate sector
without the direct risks and responsibilities associated with property ownership. Their
formation is a meticulous process that involves careful planning, compliance with legal
standards, and strategic capital allocation. The obligatory income distribution is a
hallmark of REITs, providing investors with regular dividends. By investing in a diverse
range of real estate assets, REITs can provide portfolio diversification and potential for
long-term growth, cementing their role as a cornerstone in the portfolios of many
investors. Whether you are a seasoned investor or new to the scene, understanding the
operational facets of REITs can significantly inform your investment decisions and
strategies.

To view or add a comment, sign in

More articles by this author

https://www.linkedin.com/pulse/inside-look-real-estate-investment-trusts-reits-sage-bs-cm-ms-xrcm-y1duc 4/7
5/6/24, 8:53 PM An Inside Look at Real Estate Investment Trusts (REITs): Formation, Income Distribution, and Investment Allocation

How to Finance Your Real The Impact of Economic Real Estate Crowdfunding
Estate Investments Factors on Real Estate… A New Frontier for…
Apr 29, 2024 Apr 29, 2024 Apr 29, 2024
See all
Insights from the community

Financial Services

What are the best revenue forecasting metrics for a real estate investment trust?

Commercial Real Estate

What do you do if your commercial real estate investment fails?

Commercial Real Estate

What is the best way to dispose of underperforming assets in a commercial real estate portfolio?

Real Estate

What are the common pitfalls and challenges of investing in REITs?

Real Estate Development

What's the best way to develop a long-term strategy for your real estate portfolio?

Commercial Real Estate

What do you do if you want to thrive in commercial real estate during your later years?

Show more

https://www.linkedin.com/pulse/inside-look-real-estate-investment-trusts-reits-sage-bs-cm-ms-xrcm-y1duc 5/7
5/6/24, 8:53 PM An Inside Look at Real Estate Investment Trusts (REITs): Formation, Income Distribution, and Investment Allocation

Others also viewed

Know about REITs (Real Estate Investment Trusts).

Sainyam Gupta · 1y

Exploring the Benefits of Real Estate Investment Trusts (REITs)

Add India Group · 1mo

Real Estate Investment Trusts (REITs)

RECAP · 2mo

Real Estate Investment Trusts (REITs)

Tamer Mahfouz · 2mo

YOU CAN BE A REAL ESTATE TYCOON ON A BUDGET. HERE'S HOW TO DO IT.

Victor Liew · 4y

What is a REIT?
Mason Carhart · 1y

Show more

Explore topics
Sales

Marketing

Business Administration

HR Management

Content Management

Engineering

Soft Skills

See All

https://www.linkedin.com/pulse/inside-look-real-estate-investment-trusts-reits-sage-bs-cm-ms-xrcm-y1duc 6/7
5/6/24, 8:53 PM An Inside Look at Real Estate Investment Trusts (REITs): Formation, Income Distribution, and Investment Allocation

© 2024 About

Accessibility User Agreement

Privacy Policy Cookie Policy

Copyright Policy Brand Policy

Guest Controls Community Guidelines

Language

https://www.linkedin.com/pulse/inside-look-real-estate-investment-trusts-reits-sage-bs-cm-ms-xrcm-y1duc 7/7