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A REIT (pronounced REET), or real estate investment trust, is an entity that holds a portfolio of commercial real estate or real estate loans. Congress created REITs in 1960 to provide all investors, especially retail investors, with access to income-producing commercial real estate. REITs combine the best features of real estate and stock investment.
This guide will walk you through everything you need to know about real estate investing through REITs. We'll cover the types of REITs, REIT pros and cons, how to invest in REITs, and what qualifies a company as a REIT.
A REIT is an entity that invests in commercial real estate, residential rental properties, or real estate-backed loans. They lease space to tenants and collect rental income or earn interest income on their debt investments. REITs must distribute at least 90% of their taxable net income to shareholders via dividend payments.
There are several types of REITs. Let's start with classifying REITs by access:
Within those REIT types are three subcategories by asset type:
Finally, we'll look at the 13 equity REIT types by sector or property type:
Investing in REITs has several benefits, including:
However, REITs also have some drawbacks, including:
There are many ways to invest in REITs. The easiest way is to buy shares of publicly traded REITs through a brokerage account. An investor can purchase a diversified REIT or invest in several different REITs to build a diversified real estate portfolio. REITs are relatively inexpensive to buy, with most trading for less than $100 a share.
Another way to invest broadly across the REIT sector is to buy a mutual fund or exchange-traded fund (ETF) focused on REITs. REIT ETFs and REIT mutual funds are also easy to buy and relatively inexpensive.
Finally, you can invest in public non-traded REITs through a financial advisor or a real estate crowdfunding portal, which makes them a little more challenging to purchase. They also often have higher minimum investments, usually $2,500 or more to start.
Here are some practical tips for those looking to start investing in REITs:
Companies must meet specific criteria to qualify as a REIT, which receives special tax treatment and doesn't pay corporate income tax. These qualifications include:
REITs have the following tax advantages:
However, a portion of a REIT's dividend payment is often a nonqualified dividend, which gets taxed at the higher ordinary rate if held in a regular brokerage account.
Congress created REITs so that anyone could own income-producing real estate. REITs must pay a dividend, making them a great way to earn passive income. Add in their diversification benefits and historical returns, and REITs can be an excellent investment option.
