A “REIT” refers to a Real Estate Investment Trust, which is a type of security. The REIT is basically an investment vehicle that owns real estate that produces income. Such real estate is also known as commercial real estate and might include, for example, hotels, offices, or warehouses. A REIT is not like a traditional real estate company: it does not develop properties with the goal of reselling them. Instead, a REIT purchases and develops real estate properties in order to run them as a part of its investment portfolio.
When someone invests in a REIT, they are investing in major-scale, income-producing real estate in order to earn a share of that income. Nearly anyone, from small-scale to large-scale investors, both in the United States and worldwide, can invest. The REIT provides these investors with access to real estate without them having to actually go out, purchase and operate the properties.
REITs that acquire, manage, build and renovate real estate are more specifically known as “equity REITs.” These REITs generally earn income from leasing properties, collecting rent and management fees, and are by far the most common type of REIT. In addition, there are “mortgage REITs,” which make investments in and own property mortgages. Mortgage REITs earn income from the interest on their investments. Finally, there are also “hybrid REITs,” which make investments in both mortgages and properties.
What are the Requirements for REITs?
Each REIT must meet certain requirements, such as:
- Having a minimum of 100 shareholders.
- Investing no less than 75 percent of assets in cash, U.S. Treasuries, or real estate.
- Receiving 75 percent of the REIT’s gross income from real estate.
- Distributing at least 90 percent of the REIT’s income to investors.
While the REIT can deduct the dividend payouts, investors must still pay income tax on the money they receive.
How are REITs Purchased?
Most REITs are publicly traded on major stock exchanges. These REITs must register with the U.S. Securities and Exchange Commission (SEC). To invest in a REIT that is publicly traded, investors may purchase shares through a dealer of securities. This can include debt securities, preferred stock, or common stock – just like with any other publicly traded securities.
In addition to stock-exchange listed REITs, there are also public, non-listed REITs, which file with the SEC as well. However, their stock shares are not traded on major stock exchanges. Finally, there are private REITs, which do not file with the SEC and whose stock shares are not traded on major stock exchanges.
What are the Benefits of REITs?
REITs were created by Congress in 1960 as an investment vehicle to give average investors access to large-scale commercial properties. REITs can be diversified, or focused specifically on one area of real estate, and investors can choose accordingly. REITs are generally considered to be highly liquid assets, since shares can be purchased on the stock market. They are also considered to be total return investments, because they generally provide high dividends and the possibility of long-term, moderate capital appreciation. Ultimately, REITs provide a liquid and non-capital-intensive way for the average investor to invest in real estate.