Tuesday, April 24, 2012

What Are The Similiar Things Between A Mlp And Reit?

Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful".
Warren Buffett, legendary investor and the third richest man in the world.

The importance of investing in creating wealth is underscored by Warren Buffett's career. However, very few have the business acumen of the Oracle of Omaha and have to depend on others' expertise for managing wealth. This has given rise to investing vehicles like mutual funds, Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs).

While mutual funds have been around for some time, REITs and MLPs are comparatively recent innovations. Both of them share some similarities and differences.

A REIT is defined as a tax designation for a corporate entity investing in real estate that reduces or eliminates corporate income taxes. In return, REITs are required to distribute 90 percent of their income, which may be taxable, into the hands of the investors. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.

A MLP is defined as a limited partnership that is publicly traded on a securities exchange. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. To qualify for MLP status, a partnership must generate at least 90 percent of its income from what the US Internal Revenue Service (IRS) deems "qualifying" sources. For many MLPs, these include all manner of activities related to the production, processing or transportation of oil, natural gas and coal.

Now, let's talk about the similarities between a Master Limited Partnership (MLP) and a Real Estate Investment Trust (REIT).

One similarity, that has main implications for investors, is that they keep off the corporate income tax, on both a state and federal basis. finally, the investor's share of the proceeds increases. Another major similarity that both REITs and MLPs also share with ordinary shares, pardon the wordplay, is their tradeability. Units of both REITs and MLPs are traded on stock exchanges just like common stock.

Another similarity is that both REITs and MLPs are classified into three categories each. REITs are of the following three types:

1.Equity REITs: These own real estate like offices, malls, etc.
2.Mortgage REITs: These lend money to real estate owners or buy existing mortgages or mortgages backed securities.
3.Hybrid REITs: These are basically a mixture of the above two types - own real estate and lend money to owners of real estate.

MLPS are of the following three types:

1.Roll-up: Multiple assets or small limited partnerships combined into a larger limited partnership.
2.Rollout: A large, single multiple limited partnership like a corporation spins off some of its assets into a separate multiple limited partnerships.
3.Roll-in: New assets put into a multiple limited partnership with a guarantee to combine supplementary assets in future.

As is clearly seen, there is a lot that is common between these two investment vehicles.

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