A real estate investment trust (REIT) is a company that owns, operates or finances income-producing real estate. REITs are structured in various ways, but most commonly take the form of either an equity REIT or a mortgage REIT.
There are also hybrid REITs that own both types of property and debt investments.
The first REIT was established in 1960 by Congress to make investing in large-scale income-producing real estate less risky and more accessible to a wider pool of investors. Today, there are approximately 200 publicly traded REITs with a combined market capitalization of over $1 trillion according to the National Association of Real Estate Investment Trusts (NAREIT).
High-yield for investors
A publicly traded REIT must pay out at least 90% of its taxable income as dividends to shareholders; this attribute helps to create high yields for investors relative to other dividend-paying stocks and bonds. In exchange for this favorable tax treatment, REITs have strict governance rules they must follow including regular asset and financial reporting requirements.
Major exchanges and pink sheets
Most trades on U.S stock exchanges occur through The Nasdaq Stock Market or the New York Stock Exchange (NYSE), where nearly all major publicly traded REITS are listed. However, REITs can also be traded on secondary markets, such as the OTCQX and Pink Sheets.
Many pension funds, insurance companies and other large institutional investors invest in REITs to add diversification and income to their portfolios.
In addition, these types of investors often find it difficult or impossible to directly own certain types of real estate, making REITs an attractive investment option. For smaller investors, there are a number of exchange-traded funds (ETFs) that offer broad exposure to the REIT market with low expense ratios.
Types of REITs
Broadly speaking, there are two main types of REITs: equity REITs and mortgage
Equity REITs own and operate properties (such as office buildings, apartments, warehouses and retail centers) and collect rent from tenants to generate income for shareholders.
Mortgage REITs provide funding for income-producing real estate by originating or acquiring loans and earning interest income on those loans. Some hybridREITS combine aspects of both equity and mortgage investing strategies.
- In order to qualify as a REIT, a company must meet certain criteria set forth by the Internal Revenue Code. These include:
- The company must be organized as a corporation, trust or association;
The company must deriving at least 75% of its gross income from real estate investments and cash flow from activities related to real estate;
- At least 75% of the company’s assets must be invested in real property or mortgages loans on real property;
- No more than 25% of the shares can be owned by five or fewer people during the last half of each taxable year; and
- The company must distribute at least 90% of its taxable income to shareholders in the form of dividends.
- Different types of REITs exist including equity REITs, mortgage REITs and hybrid REITs. Equity REITs own and operate properties while mortgage REIT provide funding for income-producing real estate through originating or acquiring loans.
Some companies may follow different strategies such as development, value add or opportunistic investing. Others may specialize in certain types of properties such as office buildings, apartments, warehouses, retail centers or healthcare facilities.
Publicly traded REITs must comply with certain governance rules including regular asset and financial reporting requirements.
They also must pay out at least 90% of their taxable income as dividends to shareholders, which helps create high yields for investors relative to other dividend-paying stocks and bonds.
Are REITs a good investment?
REITs offer several benefits to investors, including high yield potential, diversification and liquidity. However, they also come with some risks, such as the potential for tenant defaults or declines in property value.
Before investing in a REIT, be sure to research the company thoroughly and consult with a financial advisor to ensure that it fits your investment goals and risk tolerance.