:Hello and welcome to the Millionacres course REIT basics. This course is designed for anyone who's interested in investing in Real Estate Investment Trust. You may have bought other stocks before, but have been unclear about how REIT are different, or you may be learning about them for the first time. Our goal with this course is to empower you to be able to understand what it is and how it generates and distributes income, as well as to be able to evaluate for potential investment.
The final project in this course is an analysis of a publicly traded REIT. They're reading an activity assignments throughout this course. These are designed to help you get the most benefit from what you are learning. Final project is an exercise to give you a framework that will guide you throughout your investing future. REIT investing can be rewarding and exciting, but it's not without its homework. People often refer to REIT as passive income. That's not how we see it here at Millionacres. All real estate is both active and passive. The best investors are the ones we're able to learn and grow overtime.
Let's get started. What is the REIT and why is it different from other stocks? You may have heard the term REIT and wondered what it means. REIT, R-E-I-T simply stands for Real Estate Investment Trust. REIT were created by Congress in 1960 specifically to give investors access to commercial real estate.
As you might guess, when the government gets involved, rules follow and the structure of REIT have a lot of rules. REIT do have the benefit of not being taxed on the corporate level. But in order to do that, these companies need to meet certain ongoing requirements. Let's take a look at some of the criteria that need to be met for a company to qualify as a Real Estate Investment Trust in the United States. First, the company needs to invest at least 75 percent of its total assets in real estate. This doesn't necessarily mean properties after all there are mortgage rates that don't own any properties at all, but assets that are directly related to real estate investments.
Second, the company needs to drive at least 75 percent of its gross income from real estate-related activities. This can include rental income, interest income from mortgage debt owed, or from selling properties. It could also include income from things produced by the properties. For example, some REIT owned timberlands and earn income from selling wood and wood product, which can also have ownership of other companies.
An example of this would be Simon Property Group which owns parts of several retail brands. The company needs to pay at least 90 percent of its taxable income to investors as dividend. This is probably the most well-known attributed REIT, but probably also the most misunderstood. We'll talk a lot about this later in the course. But one key factor with real estate is that you're able to depreciate properties over time. As great for taxes, but it also means a taxable income is not a great indicator of how much money a REIT is actually earning. That means that funds from operations or FFO is a far better barometer of REIT profitability as most REITs are really earnings far more than taxable income indicates. For this reason, most REITs end up paying out well over a 100 percent of taxable income. In a very sustainable way.
You'll hear a lot about FFO throughout the course. Four, the company needs to be structured as a corporation as opposed to a partnership LLC or any other entity, and it needs to be managed by our board of directors or trustees with a minimum of 100 shareholders. Most publicly traded REIT have many times that amount, but they're also non-listed REIT where this requirement can be more in question. Finally, the company cannot have more than 50 percent of its shares owned by five or fewer individuals. To guarantee compliance with this rule, REITs often limit the ownership stake of any one person to 10 percent of outstanding shares. Because of these rules, some companies don't start office REITs but become REITs later. As an investor, the important thing to know is that REITs must follow these rules. That means they have to pay out dividends as long as they're making a profit.