A REIT is established to allow a group of investors to purchase and manage a variety of real estate assets such as office buildings or apartment complexes, and members of the investor group share in the income these assets generate.
Income is derived from rental revenue, which should increase over time as rents goes up thanks to market conditions, and these profits are distributed to investors in the group.
Revenue is also generated by increases in the value of the equity of the assets.
These equity increases can either be distributed to the investors as cash or reinvested in the pool and are then reflected in higher unit values over time.
No large investments are required to participate in a REIT, so each investor can choose how much to contributes toward the purchase.
Most REITs employ an asset manager to administer the portfolio.
Asset managers should be seasoned professionals who have the knowledge, skills and expertise to make effective decisions and execute a strategy that grows the value of the portfolio.
The aim is to continually diversify the investment, increase cash flow, reduce expenses and tenant turn-over andincrease the asset values, and ultimately increase unit values.
The asset manager's remuneration is often tied to investment performance.
Investors in the group are called beneficiaries or unitholders.
Generally, their financial obligation is limited only to their initial investment.
Because REITs must distribute so much of their earnings, they tend to pay yields normally ranging from 5% to 10% derived from the properties' cash flows alone.
Additionally, as the properties appreciate in value over time, they can be either sold or refinanced, and the increased equity, if reinvested rather than being distributed in cash, is reflected in unit values.
This increase in unit value is completely tax deferred until the units are sold-and at that time the increase in unit value is treated as a "capital gain", and therefore subject to a lower tax rate than regular income.