REITs - Real Estate Investment Trusts
With the collapse of the housing markets and real estate sector, REIT fraud has become more apparent. Investors are bringing claims against their brokerage firm or financial advisors that recommended unsuitable, for fraudulent REITS that were Ponzi schemes or for failing to disclose the high fees and commissions associated with the sale of REIT investments.
To qualify as a REIT with the Internal Revenue Service (IRS), a real estate company must agree to pay out in dividends at least 90% of its taxable profit (and fulfill additional but less important requirements). By having REIT status, a company avoids corporate income tax. Regularly formed corporate entities pay taxes on their profits, then decide how to allocate their after-tax profits between dividends and reinvestments, a REIT simply distributes nearly all of its profits and in return is not taxed on those profits.
Mortgage REITs
Fewer than 10% of REITs fall into a special class called mortgage REITs. These REITs make loans secured by real estate, but they do not generally own or operate real estate. Mortgage REITs require special analysis. They are finance companies that use several hedging instruments to manage their interest rate exposure.
Equity REITs
The vast majority of REITs focus on the "hard asset" business of real estate operations. These are called equity REITs. Equity REITs tend to specialize in owning certain building types such as apartments, regional malls, office buildings or lodging facilities. Some are diversified and some are specialized, meaning they defy classification - such as, for example, an REIT that owns golf courses.
Hybrid REITs
Hybrid REITs invest their assets in mortgages and hard assets. In effect, they employ strategies used by both Equity REITs and Mortgage REITs.
REIT Claims
REITs are dividend-paying stocks that focus on real estate. If you seek income, you would consider them along with high-yield bond funds and dividend paying stocks. Consider 20 years of returns for the NAREIT Equity REIT Index (an index of about 150 traded REITs) between 1984 through 2003. Returns solely from dividends have averaged about 8% and never fallen below 4.8%. Stable dividends combined with price volatility create a total return that is often promising for investors, but volatile nonetheless.
With the collapse of the housing markets and real estate sector, REIT fraud has become more apparent. Investors are bringing claims against their brokerage firm or financial advisors that recommended unsuitable, for fraudulent REITS that were Ponzi schemes or for failing to disclose the high fees and commissions associated with the sale of REIT investments.