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How does a real estate trust work?

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Quick Answer

A real-estate trust is an investment that uses the pooled capital of several investors to purchase and manage mortgage loans and commercial real estate properties. Real-estate trusts generate returns through revenue from mortgages, leases and selling properties that appreciate in value. Primary advantages of real-estate trusts are relatively high yields, special tax considerations and increased liquidity when compared to traditional forms of real-estate investment.

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How does a real estate trust work?
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Full Answer

Real-estate trusts are effective in securing exposure to large bundles of commercial real-estate properties. A real-estate trust can include investments in office buildings, apartments, hotels, warehouses, shopping malls or any other form of commercial real estate. Some real-estate trusts focus their investment strategy on specific areas or real-estate types, while others are more broad and focus solely on value investments.

The primary benefit of a real-estate trust is that it allows an investor to secure a share of the income produced through commercial real-estate ownership without having to go out and purchase the land. Investors purchase real-estate trusts either by purchasing shares directly on an exchange or by investing in a mutual fund that specializes in commercial or public real estate.

The majority of real-estate trusts provide at least 100 percent of their taxable income to their investors. Shareholders of a real-estate trust are responsible for paying taxes on dividends and capital gains they receive from their investment.

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