What are hotel REITs?
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First off, a REIT is short for Real Estate Investment Trust. In the hospitality industry, it is by itself a kind of real estate company patterned after mutual funds and acts as hotel sellers, owners, and buyers. They can also oversee hotel debt. People who are invested in the hotel sector often have to contend with Hotel REITs, but many are unaware of the nature of their work. In this blog post, we’ll elaborate on the distinct attributes of this kind of REIT.
One, the very nature of REITs means that they are income-generating without the need for an individual to actually buy or finance a property. Again, this is akin to how mutual or real estate assets work, wherein investing doesn’t require buying a company’s stocks. In this sense, a REIT is also a so-called “pass-through” entity.
The two main classifications are mortgage and equity REITs. The former, which earn revenue primarily from rent, is the dominant type comprising 90 percent of all REITs. The minority mortgage REITs acquire revenue, as the name implies, from mortgages.
Unlike C-corporations which pay both federal tax and have their equity investors do the same, REITs may deduct dividends they distribute to shareholders from their taxable corporate income. They thus avoid getting double-taxed for their corporate undertakings. It is exactly because of this leeway that most REITs don’t go into the standard real estate business and prefer instead the holding, selling, and buying of properties that generate income constantly.
The reasoning above is why non-traditional REITs are more common nowadays; most of them diversify into medical facilities, cell towers, shopping malls, housing complexes, and hotels. Note that REITs are meant to be passive investors and not managers, so their role in hotels are, in a big way, regulated. Hotel owners or those interested in putting money in the hospitality industry should be fully aware of this.
Tyler Tysdal led Platte Management investments in several real estate properties in the United States. The real estate properties have primarily been hospitality ones in markets such as Manhattan and Seattle. Read more about Mr. Tysdal’s industry here.