The Real Estate Investment Trust (REIT) was formed in 1960 by federal tax law. The goal was to influence small investors to combine their resources with others to raise venture capital for real estate transactions. REITs enjoy special income tax benefits similar to those granted to mutual funds.
They are exempt from corporate tax if they invest at least 75 percent of their assets in real estate and distribute 95 percent or more of their annual real estate income to their investors. There are three types of real estate investment trusts:
Equity trusts – In this type of trust, the investors participate as owners of large and hopefully more profitable income-producing properties
Mortgage trusts – In this type of trust, investors loan their money to be used making mortgages on commercial income properties and get their income from interest, loan origination fees and profits from buying and selling mortgages.
Hybrid trusts – These are a combination of the above types
A syndicate is a group of two or more people who unite their resources for the purpose of making and operating an investment. Members of the syndication can pool their capital to finance a real estate transaction or to purchase a piece of property. Syndicates may operate in the form of a:
Real estate investment trust
Tenancy in common
In California, the limited partnership is the preferred form.
Pension funds collect contributions from workers, and sometimes employers, and then invest those funds to create a large money pool from which the workers may withdraw when they reach retirement. The California State Teachers Retirement Fund is one example in this state. Traditionally, pension funds have been invested in stocks and bonds and this continues to be the case for the most part. More recently though, since mortgage-backed securities have become available, pension funds have begun to play a role in the real estate market by purchasing existing real estate loans in the secondary market.
An endowment in the financial world is a transfer of money or property which is donated to an institution, with the stipulation that it be invested, keeping the principal intact. This allows the donation itself to have a much greater impact over a long period of time than if it were spent all at once, due to compound interest.
Since these endowment funds are permanent, fund managers want to choose investments that are safe and will generate relatively high levels of income for long periods of time.
For this reason, endowment funds offer a good source of mortgage financing for commercial and industrial properties. Many commercial banks and mortgage companies handle investments for endowment funds.
Credit unions are nonprofit financial institutions into which members place their money, usually through direct deposit.Credit unions pay no income tax, so they can pay higher interest rates on deposits than other savings institutions.
They also offer a wide variety of loans at far lower interest rates than their competitors, making credit union membership very attractive.
Credit unions make mostly short-term loans. When they do make real estate loans they tend to be second mortgages or home improvement loans.
Under the Federal Credit Union Act, credit unions have the authority to make 30-year loans to their members to finance a principal residence. They can also make FHA or VA loans at interest rates comparable to market value.