What is real estate investment trust (REIT)?

what is real estate investment trust

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 REITsEquity 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