REIT investors, on the other hand, are typically investing in a portfolio of properties. This portfolio can change over time as the REIT's management team disposes of poorly performing properties to invest in properties with higher returns. A REIT also usually continues to add more real estate assets to a portfolio as more investors purchase shares.
An investor's capital is typically tied up for several years when they invest in crowdfunding. The same is usually 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 don't have to raise capital for each individual deal and possibly miss out on deals because you can't act quickly enough.
A REIT is an ongoing operation that can move in and out of investments to maximize the return. Investors essentially agree to trust you with your asset management abilities to give you more flexibility on how to best use the capital available. With a syndicate, you have to sell investors on your vision and plan for each specific investment you want to make.
A popular reason to start a REIT is the tax benefits. REITs usually aren't taxed on the trust level. Instead, investors are taxed on their dividends.
One of the main requirements of a REIT is that it must pay out at least 90% of its taxable income as dividends. And since depreciation is a major noncash expense used as a deduction for taxes, a REIT almost always pays out at least 100% of its taxable income. This leaves untaxed money in the REIT that can be used for other investments.
How to start a REIT
The Internal Revenue Service (IRS) requires a company to reach certain thresholds before classifying it as a REIT, and there are specific requirements the company must continue to meet. The following steps are a common strategy investors use to start a private REIT.
Decide which type of REIT you want to form
Unless you're already sitting on a $100 million-plus real estate portfolio, 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.
