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How the REIT Law Amendment Affects Real Estate Investors
April 3, 2023 by Jasmin Catajan
Negros Occident, Chair of the House Committee on Economic Affairs said, "A REIT is a kind of financial device that delivers a return on investment derived from rent of the underlying property. It is a stock company founded primarily for the intent of possessing revenue real estate properties such as apartment blocks, office buildings, healthcare centers, clinics, vacation rentals, resorts, highways, storage facilities, shopping malls, and railways, among many others."
What is Real estate investment trust (REIT)?
A business that owns, manages, or funds properties with an income potential is known as a real estate investment trust (REIT). REIT aggregate the capital of many investors in a manner similar to mutual funds. Individual investors can now benefit from real estate investments, such as a property for sale, and get dividends without having to invest in, maintain or finance any real estate themselves.
REITs typically focus on a certain area of real estate. Diversified and specialty REITs, on the other hand, could include a variety of various property kinds in their portfolios, including a REIT that owns both commercial and retail assets. Several REITS are listed on significant stock exchanges, where buyers and sellers can trade them like stocks at any time during the trading day. These REITs are regarded as particularly liquid instruments and frequently trade in high volumes.
The majority of REITs operate under a simple corporate structure: they lease out space, collect rent on the buildings, and they pay dividends to shareholders. Mortgage REITs finance real estate rather than owning it. The income on their investments is how these REITs make money.
A business must adhere to specific Internal Revenue Code requirements in order to qualify as a REIT (IRC). To meet these requirements, you must primarily own real estate that generates income over the lengthy period and share profits to shareholders.
Different types of REITS
Equity-based REITs. The majority of REITs are equity REITs, who also own and operate real estate that generates income. Rent is the main source of income generating real estate.
REITs that invest in mortgages. Mortgage REITs provide financing to real estate owners and managers primarily by mortgages and loans or indirectly throughout the purchase of securities backed by mortgages. Their incomes is mostly derived from the net interest margin, which is the difference between the interest they get on residential mortgages and the expense of financing these loans. They may be vulnerable to increases in interest rates as a result of this model.
Real estate investment trusts (REITs) that include equity and mortgage components are known as hybrid REITs. Equity REITs hold real estate, and mortgage REITs engage in residential mortgages or mortgage-backed securities. Hybrid REITs allow investors to invest in a single fund that has the flexibility to modify its assets according to present economic trends and management experience, allowing them to obtain the benefits of both with less risk than if the bought in one or the other.
REITs are traded publicly. Individual investors can buy and sell shares of publicly traded REITs that are listed on nationwide securities exchange.
Advantages and Disadvantages of Investing in REITS
They are a pretty simple place to start when investing in commercial real estate. Because to their high liquidity and ability to be traded on public markets, most REITs are easy to purchase and sell, eliminating one of the greatest disadvantages of conventional commercial real estate investing. Naturally, this increases their appeal as a way to diversify an investment strategy that might be underrepresented by real estate.
Despite all of their advantages, REITs do not always guarantee investors success. For instance, REITs may not be the optimal investment option regarding capital appreciation, even though this isn't necessarily a deal breaker for most people. After all, REITs must distribute at least 90% of their taxable revenue to investors in the form of dividends, leaving a pitiful 10% available for fresh investments in the form of acquisitions or capital projects. Any perceived growth is typically driven by price growth.
What is Income generating real estate?
Real estate investing can come with several benefits. Yet with so many options, picking the best one can be difficult. Here are the most common investment options for simplicity's sake.
A new real estate investor frequently chooses single-family homes as rental properties. Beginners enjoy them since investing in them is quite simple as well as also reasonably priced.
In addition. financing single-family homes is much easier to obtain. This is due to the fact that the property is less expensive, which leads to lower monthly payments than with conventional financing for investment properties.
Due to the lack of professional property management components, single-family homes can be a high-income-producing real estate asset. Your properties are simple to manage. Your rental property expenses will be reduced as a result, and your net income will rise.
To save money for their ideal home, today's youthful generations are living in rental properties. Here, among people of this age, the interest for studio apartments has sharply risen. As a college student, it gives more affordable and effective space for departing. You may benefit greatly from investing in a neighborhood close to a college or university campus.
Currently, the best option for real estate that can generate money is an apartment building. Apartment purchases can be very profitable. With an apartment complex, you can find everything from safe financing and simple management to high rental demand. Each investor, whether new or seasoned, can find them to be the ideal fit.
Commercial real estate
Ultimately, investors choose commercial real estate investments over other options. Millions have been made by investors using this chance. These properties are a little more difficult to manage than residential real estate. Hence, to invest in commercial properties, you need to be properly informed about real estate.
The risk is much higher here as well, but the potential income makes it worthwhile. As the landlord, you don't need to stress about the monthly rent because the renters are likely to be seasoned corporations or business owners who don't want to jeopardize their standing in the industry.
How Securities and exchange commission work?
The SEC's main job is to regulate entities and people who work in the securities industry, such as stock exchanges, brokerage houses, traders, financial advisors, and fund managers. The SEC encourages transparency, information sharing, ethical business practices, and fraud prevention through developed financial laws and regulations.
Its aims are to interpret security laws, implement enforcement measures, establish new regulations, supervise financial institutions involved in securities, and coordinate regulation across various levels of government.
What is a Capital stock?
A business may issue capital stock to raise money to expand. Investors looking for price growth and dividends may purchase issued shares, or they may exchange them for assets such as operational equipment.
A business may be able to raise cash by issuing capital stock without taking on debt and related interest costs. The corporation would be giving up more stock, which would lower the value of each outstanding share, and that is one of the disadvantages.
The cash a firm receives from issuing capital stock is accounted for in terms of investment and additional paid-in capital in the stockholder's equity column of the balance sheet. This money is thought of as capital contributions from investors.
Types of Capital Stock
Authorized share: The number of authorized shares is the total number of shares that a firm may issue. This is typically outlined in the industry's constitution, which may also specify the step to approve more shares.
Issued share: Shares that have already been sold to investors by the corporation are referred to as issued shares.
Unissued share: The portion of approved shares that have yet to be issued are known as unissued shares. Keep in mind that overall number of share capital should equal the sum of the issued and unissued shares.
Treasury share: As a result of a repurchase, treasury shares are newly issued interests that the corporation retains on its account. Both dividends and voting rights are absent from these shares.
Benefits and Drawbacks of Capital stock
Contrary to borrowing money or bond sales, a business is not obligated to pay back capital investors on a predetermined schedule. Furthermore, it is cheap for a business to issue new interests, which can then be sold for a lot more money than it cost to issue the securities.
Capital stock is a representation of equity in the business. The founders of a firm run the danger is a representation of equity in the business if they sell the majority of the voting shares to outside investors. Furthermore, securities rules will oblige the company to provide information about its financial health regardless of whether it just sells a limited number of shares.
Operational and financial reporting
Operational reporting is concerned with creating thorough accounts of ongoing organizational operations. These reports provide information on production costs, documentation, resource usage, in-depth analyses of operations, and even finance.
These reports appear at various times but they often concentrate on the near term. Certain stakeholders can also alter operational reports and adjust them to their needs to offer clearer insights.
An organizational picture that is structural and tactical is provided by operational reporting. It describes the operational process on a daily basis with an emphasis on providing insights that may be used right away. These papers give a thorough overview of the current and pressing needs while emphasizing the most pressing ones. Operational reports are typically utilized as the foundation for quick decision-making within businesses.
An operational reporting tool is frequently used in sectors with numerous interdependent components. To make everyday changes, a manufacturing company for example, can measure a number of important components of its production chain. In this situation, an operational report can contain information on capital cost and utilization, productivity improvement, and even the condition of various pieces of equipment.
Accounting, finance, and the business all need to comprehend and value one of the most important business processes: financial reporting. To improve corporate performance and outcomes, financial reporting is the thorough examination of monthly, quarterly, or annual financial data. Your company's performance can be better understood and chances for future growth can be found with the aid of a reliable and precise financial reporting procedure.
Financial reporting's primary objective is to assist stakeholders, business partners, department heads, and finance in making strategic decisions regarding a company's operations, expansion, and future profitability based on the business's general financial condition and sustainability.
For public companies, financial reports must be submitted at least quarterly and annually, although internal measurement is often carried out regularly.
Foreign ownership limitations imposed
In the real estate industry, foreign ownership limitations are imposed to regulate the amount of foreign investment in the sector. These limitations set the maximum amount that a foreign individual or company may contribute to a local real estate business by purchasing shares.
To comply with these restrictions, implementing rules and regulations must be followed by foreign investors who wish to own and run a company in the Philippines. These rules include satisfying various ownership requirements, such as meeting the minimum paid-up capital and other compliances.
While the Philippine Constitution and other laws permit foreign investors to own up to 100% of any local commercial enterprise, restrictions still apply to the real estate industry to ensure a balanced and controlled foreign investment flow. As such, foreign investors must carefully comply with these ownership requirements and restrictions to participate in the sector's growth and development.
How the Real estate Tax Reform Bill affects Investors?
Real estate investors can now take advantage of a new tax incentive that grants a 20% reduction on taxable net income for pass-through businesses. This incentive applies to Real Estate Investment Trusts (REITs) as well, allowing them to enjoy tax benefits when owning and managing real estate-related assets.
Pass-through businesses, a unique corporate structure popular among small business owners, enable investors to avoid double taxation by only paying taxes at the individual level.
This new policy enhances the financial feasibility of owning income-producing properties, like apartment rentals, thereby encouraging landlords to keep their assets for a more extended period. By establishing a limited liability company for their lease, landlords can now incur the pass-through rate (20%) instead of the usual income tax rate, which can reach up to 37%.
With this new tax incentive, REITs shall experience an outstanding capital shock, potentially attracting more investors to participate in the sector's growth and development. Overall, this policy creates an advantageous environment for real estate investors, offering them a unique opportunity to benefit from tax incentives while contributing to the country's economic development.
Related Blog: How REITs Reinvesting in the PH is Advantageous for Real Estate Property Values