REIT Explained: Guide to Real Estate Investment Trusts

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate across a range of property sectors. REITs allow individuals to invest in large-scale, diversified portfolios of real estate assets—such as office buildings, apartments, shopping centers, hotels, and warehouses—without having to buy or manage properties directly.

How Do REITs Work?

REITs pool capital from many investors to purchase and manage real estate or real estate-related assets. When you buy shares in a REIT, you become a partial owner of all the properties or mortgages held by that trust. REITs are professionally managed, with fund managers making decisions about property acquisition, leasing, and sales.

REITs generate returns for investors in two primary ways:

• Income: Most REITs earn income from rent paid by tenants or interest from mortgage loans. By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends, making them a popular choice for income-focused investors.

• Appreciation: If the value of the underlying properties increases, the value of the REIT’s shares may also appreciate, offering potential for capital gains.

Types of REITs

REITs can be classified in several ways, including by the type of assets they invest in and how their shares are traded:

Mortgage REITs	Provide financing for real estate by buying or originating mortgages and mortgage-backed securities; income comes from interest

Hybrid REITs	Combine both equity and mortgage investments

Publicly Traded	Listed on major stock exchanges; shares can be bought and sold like stocks

Public Non-Traded	Registered with the SEC but not traded on exchanges; less liquid

Private REITs	Not registered with the SEC and not publicly traded; typically for institutional investors

REITs may also specialize by sector, such as retail, residential, healthcare, office, industrial, infrastructure, or data centers.

Key Benefits of Investing in REITs

• Diversification: REITs invest in a range of property types and locations, helping spread risk and reduce reliance on any single asset.

• Liquidity: Publicly traded REITs can be bought and sold easily on stock exchanges, unlike direct real estate investments.

• Regular Income: REITs must pay out most of their income as dividends, providing a steady income stream.

• Accessibility: REITs lower the barrier to entry, allowing investors to gain exposure to real estate with modest capital.

• Professional Management: Experienced teams handle property selection, leasing, and maintenance.

• Inflation Hedge: Many REITs can increase rents over time, helping to protect against inflation.

Potential Risks and Drawbacks

• Interest Rate Sensitivity: REITs can be affected by rising interest rates, which may reduce their appeal compared to bonds or other fixed-income investments.

• Market Volatility: Publicly traded REITs are subject to stock market fluctuations.

• Sector Concentration: Some REITs focus on specific sectors (e.g., retail, healthcare), which can increase risk if that sector underperforms

• Dividend Taxes: REIT dividends are typically taxed as ordinary income, which may be higher than the rate for qualified dividends or capital gains.

• Fees: Some non-traded REITs charge high upfront and management fees, which can eat into returns.

How to Invest in REITs

• Direct Purchase: Buy shares of publicly traded REITs through a brokerage account, just like you would with stocks.

• REIT Mutual Funds or ETFs: Invest in funds that hold a basket of REITs, offering instant diversification.

• Retirement Accounts: Many retirement plans allow REIT investments, providing tax advantages.

REIT Requirements

To qualify as a REIT under U.S. law, a company must:

• Invest at least 75% of total assets in real estate, cash, or U.S. Treasurys.

• Derive at least 75% of gross income from rents, mortgage interest, or real estate sales.

• Pay at least 90% of taxable income as dividends to shareholders.

• Be managed by a board of directors or trustees.

• Have at least 100 shareholders and not be closely held.

Bottom Line

REITs offer a simple, liquid, and accessible way to invest in real estate and benefit from steady income and long-term growth. While they come with unique risks—such as interest rate sensitivity and sector concentration—REITs can be a valuable addition to a diversified investment portfolio, especially for those seeking regular income and exposure to real estate markets.

Always review the specific REIT’s portfolio, fees, and strategy before investing, and consider how it fits with your overall financial goals and risk tolerance.