A real estate investment trust (REIT) is simply a particular type of company such as an investment fund or security that owns, operates, acquires, develops, manages real estate assets or an income-producing properties.
A real estate investment trust invests in real estate based capital market instruments and rights.
A real estate investment trust can be publicly traded on the stock exchange. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification, and long-term capital appreciation.
The fund is operated and owned by shareholders who contribute money to invest in all kinds of commercial real estate including land, timberlands, student housing, apartments, industrial land, medical offices, hotels, public infrastructure, offices, retail, data centers and more.
Investors don’t invest directly in the real estate. They buy shares in the company that owns the property and thus receive benefits from the properties owned by the REIT. Real estate investment trusts (REITs) give the average person an opportunity to invest in commercial property as a way to recognize wealth and have a diversified personal portfolio.
According to the National Association of Real Estate Investment Trusts (NAREIT), a company must meet a few specific requirements to qualify as a REIT:
- Invest at least 75 percent of its total assets in real estate
- Derive at least 75 percent of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
- Pay at least 90 percent of its taxable income in the form of shareholder dividends each year
- Be an entity that is taxable as a corporation
- Be managed by a board of directors or trustees
- Have a minimum of 100 shareholders
- Have no more than 50 percent of its shares held by five or fewer individuals
What are the types of real estate investment trusts(REITs)?
There are two primary types of REITs: Equity REITs and mortgage REITs. Many REITs are registered with the SEC and are publicly traded on a stock exchange. These are known as publicly traded REITs. Others may be registered with the SEC but are not publicly traded. These are known as non- traded REITs (also known as non-exchange traded REITs). This is one of the most important distinctions among the various kinds of REITs. Before investing in a REIT, you should understand whether or not it is publicly traded, and how this could affect the benefits and risks to you.
- Equity REITs– Equity REITs are typically classified by the types of properties owned. The NAREIT Composite Index is segmented by property types, including office, residential (apartments), shopping centers, and regional malls. Income is generated in the form of rent, mainly from leasing office space, warehouses, and hotels, which is eventually distributed as dividends to shareholders.
- Mortgage REITs – There are two types of mortgage REITs, commercial and residential.Commercial mortgage REITs invest primarily in loans and securities backed by commercial properties. Residential mortgage REITs focus primarily on originating and acquiring single-family home loans. Earnings are generated from mortgages via lending money to real estate owners or buying existing mortgage-backed securities. The margin between the interest earned on mortgage loans and the cost of funding these loans is the income derived from this investing activity.
- Hybrid REITs– combination of investing in properties and mortgages by owning properties while extending loans to real estate investors. Revenue comes from both rent and interest income.
- Public non-listed REITs – PNLRs are registered with the SEC but do not trade on national stock exchanges. Like stock exchange-listed REITs, public non-listed REITs, or PNLRs, own, operate and/or finance real estate and are subject to the same IRS rules. In addition, PNLRs are required to make regular SEC disclosures, including quarterly and yearly financial reports.
- Private REITs – Private REITs are offerings that are exempt from SEC (the Securities and Exchange Commission) registration and whose shares do not trade on national stock exchanges .
How do I invest in REITs or how to buy and sell REITs?
You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a broker. You can purchase shares of a non-traded REIT through a broker that participates in the non-traded REIT’s offering. You can also purchase shares in a REIT mutual fund or REIT exchange-traded fund.
A broker, investment advisor or financial planner can help analyze an investor’s financial objectives and recommend appropriate REIT investments.
Sources:Nareit,Barclays,CFI
FAQs
REITs earn income from the collection of rents and fees on the real estate they own. They then pay out a portion of this income to its investors as dividend payments on a regular basis, often quarterly or twice a year. You can also earn money by selling your shares in a REIT.
What is a real estate investment trust REIT? ›
What is a REIT? A Real Estate Investment Trust (REIT) is a security that trades like a stock on the major exchanges and owns—and in most cases operates—income-producing real estate or related assets. Many REITs are registered with the SEC and are publicly traded on a stock exchange.
What is a real estate investment trust (REIT) Quizlet? ›
Real estate investment trusts (REITs) are companies that own, and usually operate income producing real estate. REITS generally own many types of commercial real estate, including multifamily, warehouses, and retail.
What is the REIT law for real estate investment trust? ›
The REIT Law together with its IRR, has rules on minimum public ownership, conflict of interest, related party transaction, limitations on compensation and fees paid by a REIT, restrictions on investment activity of a REIT, fit and proper rule and rules on oversight of independent directors.
Why is REIT a good investment? ›
Why REITs make a good investment. REITs offer investors several benefits that make them an ideal fit in any investment portfolio. These include competitive long-term performance, attractive income, liquidity, transparency, and diversification.
What is REIT in simple terms? ›
A real estate investment trust (“REIT”) is a company that owns, operates or finances income-producing real estate.
What is REIT and how it works? ›
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool capital investors who earn dividends from real estate investments. Investors do not individually buy, manage, or finance any properties.
What are REITs and how do you invest? ›
What is REIT?
- A company that owns a portfolio of income-generating properties.
- Like Mutual Funds, in a REIT, money is pooled from numerous investors.
- In return, investors are issued units representing fractional ownership.
- Income from properties is distributed to unitholders at regular intervals.
Many single investors cannot afford to buy the investment themselves. A real estate investment trust allows multiple investors to pool their resources so the REIT can proceed. Then, the REIT also helps clarify who owns the investment and in what shares.
What does REIT stand for quizlet? ›
real estate investment trusts (REITs) corporations, trusts, or associations that own, & usually operate income-producing real estate or products relating to real estate. 1 / 44. 1 / 44.
A REIT can purchase real property directly from a seller for cash or for cash and a note. In this case, after the sale, the seller has no ownership interest in the REIT. As an alternative, the seller of property such as dealer, can transfer his property to the REIT in return for REIT shares.
How do REITs make money? ›
REITs make their money through the mortgages underlying real estate development or on rental incomes once the property is developed. REITs provide shareholders with a steady income and, if held long-term, growth that reflects the appreciation of the property it owns.
Can I sell my REIT anytime? ›
While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.
Are REITs safer than stocks? ›
REITs have outperformed stocks on 20-to-50-year horizons. Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large. Several individual REITs delivered significantly higher returns than the S&P 500.
What are the pros and cons of REITs? ›
Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.
Can I start my own REIT? ›
According to IRS requirements, your company must have at least 100 shareholders by its second tax year to qualify as a REIT. This means you can start your operations with two or more shareholders if you reach the requirement a year later.
Are real estate REITs a good investment? ›
Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.
Is a REIT better than owning property? ›
Perhaps the biggest advantage of buying REIT shares rather than rental properties is simplicity. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Diversification is another benefit.
Is REIT a risky investment? ›
Are REITs Risky Investments? In general, REITs are not considered especially risky, especially when they have diversified holdings and are held as part of a diversified portfolio. REITs are, however, sensitive to interest rates and may not be as tax-friendly as other investments.
Can I invest $1000 in a REIT? ›
While they aren't listed on stock exchanges, non-traded REITs are required to register with the SEC and are subject to more oversight than private REITs. According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.
