A real estate investment trust (REIT, pronounced “reet”) is a security that directly invests in real estate, by buying and selling property much like stocks on exchanges. REITs are essentially mutual funds that invest in real estate.
A REIT invests via properties or mortgages and receives special tax considerations. As investor incentives, REITs offer high yields and a liquid method of investing in real estate. In other words, REITs are corporations that own and manage portfolios of real estate properties and mortgages; anyone can buy shares in a publicly traded REIT.
Interested in becoming a real estate agent? You’ll need to be at least 18 years old, possess a high school diploma or equivalent, pass a written exam, and complete a specific number of hours of real estate courses.
Investing in real estate isn’t financially feasible for most Americans. Commercial real estate, in particular, is expensive and requires a significant upfront investment. It’s not easy to qualify for a commercial real estate loan. However, a REIT pools several small investors’ resources and allows them to invest in large-scale commercial real estate as a group.
A REIT provides advantages in the form of liquidity and diversity; unlike with true real estate, you can easily sell shares. With a portfolio of properties instead of a single piece of property, shareholders face much less financial risk.
REITs were first developed in 1960 to democratize the real estate market following the equity-purchase investment model. At least 90% of a REIT’s taxable income must be distributed annually to shareholders as dividends.
REITs are permitted to deduct dividends paid to shareholders from their corporate taxable incomes to maintain pass-through entity status, so most REITs owe no corporate tax. As a result, the REIT passes the responsibility of paying these taxes to its shareholders.
To qualify as a REIT (as overseen by the IRS), a company must have at least 75% of its assets tied to real estate investments. The corporation must be structured as a business trust, and a board of directors or trustees must manage it. Shares must be fully transferable, and each REIT must have at least 100 shareholders.
REIT qualification is also dependent on the company’s makeup. Five or fewer individuals can hold no more than 50% of its shares during the last half of each taxable year. At least 95% of a REIT’s gross income must come from financial investments, and at least 75% of its gross income must come from rent or mortgage interest.
The three REIT types are equity REITs (eREITs), mortgage REITs (mREITs) and hybrid REITs.
As of 2022, there were 225 REITs registered with the U.S. Securities and Exchange Commission (SEC). Most of them trade on the New York Stock Exchange. These REITs’ combined equity market capitalization is a whopping $1 trillion.
Some REITs aren’t publicly traded, and some aren’t registered with the SEC. According to the IRS, roughly 1,100 U.S. REITs have filed tax returns.
In short, yes. Because of the high yields and liquidity, a real estate investment trust is great for those who want to invest in real estate but don’t have the capital to buy property. There is also less financial risk involved with owning shares in a REIT because it’s a mixed portfolio of various real estate properties instead of stock in one particular property.
While REITs have many advantages, there’s some risk involved. Keep these drawbacks in mind when you’re deciding whether to invest in a REIT:
There are two ways to make money with a real estate investment trust: dividends and trading.
To invest in a real estate investment trust, buyers must find a trusted broker or financial advisor. Depending on their holding company, these financial experts will have access to various publicly held and nontraded REITs and can offer investment tips informed by market intelligence. They will be able to customize your investment portfolio to meet your needs.
Although it’s essential to seek advice from a credible broker or financial advisor, it is also important to go into an appointment with an understanding of REITs and questions about how to supplement your investments. Any person who sells REITs must be registered with the SEC; not doing so is considered fraud. To see if someone is registered with the SEC, use the SEC EDGAR system.
Investing in real estate without the necessary starting capital can be challenging, but REITs help make it possible. Of course, as with any investment, REITs have unique rewards and drawbacks. If you’re thinking about using a REIT to purchase a stake in a property, ensure your broker is reputable. Additionally, keep in mind that you won’t make a profit quite as fast as you would with a personal investment, so try to diversify your portfolio.
Elaine J. Hom contributed to the writing and reporting in this article.