What is a Real Estate Investment Trust (REIT)?

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 provide a way for individual investors to earn a share of the income produced through commercial real estate ownership without actually having to buy, manage, or finance any properties themselves. These companies typically trade on major stock exchanges, making them a relatively liquid asset compared to direct real estate investments.

REITs are modeled after mutual funds and pool capital from many investors to purchase and manage real estate properties or real estate-related assets. They generate income primarily through the rents collected on the properties they own or interest payments from financing real estate. By law, REITs must distribute at least 90% of their taxable income to shareholders in the form of dividends, making them attractive to income-focused investors.

Let's take a look at the numerous types of REITs available on the market:

Equity REITs - These REITs own and operate income-producing properties. They generate revenue mainly through leasing space and collecting rent on properties like shopping malls, office buildings, apartments, and hotels.

Mortgage REITs (mREITs) - These REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities. They earn income from the interest on these financial assets.

Hybrid REITs - As the name suggests, hybrid REITs combine the investment strategies of both equity REITs and mortgage REITs. They own properties and invest in mortgages.

Why should I invest into REITs?

Well, for starters, since REITs are required to pay out 90% of their taxable income as dividends, they tend to offer higher dividend yields compared to other stocks. REITs also provide diversification benefits by allowing investors to add real estate to their investment portfolios without the need to buy physical properties.

Unlike direct real estate investments, which can take months or even years to buy or sell, REITs are traded on major stock exchanges, providing investors with liquidity and the ability to buy or sell shares quickly. Additionally, REITs are managed by experienced professionals who handle the acquisition, leasing, and management of properties, which can be a major advantage for investors who prefer a hands-off approach.

Finally, real estate has historically been considered a hedge against inflation. As inflation rises, property values and rental income tend to increase, potentially benefiting REIT investors.

While REITs can be very beneficial to investors, they also do come with some critiques and dangers. For example, REITs are sensitive to interest rate changes. Rising interest rates can make REIT dividends less attractive compared to other fixed-income investments, potentially impacting their stock prices.

Further, during economic downturns, properties owned by REITs may experience higher vacancy rates, lower rental income, or declining property values, affecting overall performance.

Finally, different types of REITs come with unique risks. For example, retail REITs may be affected by the rise of e-commerce, while office REITs may face challenges due to shifts toward remote work.

Miscellaneous Types of REITs to Invest in:

Publicly Traded REITs: These REITs trade on major stock exchanges like any other stock, and investors can buy shares through a brokerage account.

REIT Mutual Funds and ETFs: These funds invest in a diversified portfolio of REITs, offering investors broad exposure to the real estate market with a single investment.

Private REITs: These are not traded on public exchanges and are generally available only to accredited investors. They often require a higher minimum investment and may lack liquidity. They are less common for your typical REIT investor.

The Bottom Line

REITs are yet another wonderful investment that anyone can add to their portfolios. Acknowledging how real estate investment trusts function and how they can benefit you as an investor can allow you to grow your portfolio even further. With high dividend yields, diversification benefits, and the opportunity to grow, REITs can positively impact you in so many ways. Stay learning!