- REITs raise money by selling shares to many investors, similar to how companies issue stock.
- The pooled capital is used to purchase or finance a portfolio of income-generating real estate properties. These can include a diverse range of properties like apartment buildings, shopping malls, office spaces, warehouses, data centers, and even timberland.
- REITs primarily generate income through rent collection from tenants or interest earned on mortgages and mortgage-backed securities related to real estate.
- To qualify as a REIT and receive favorable tax treatment, they are legally required to distribute at least 90% of their taxable income to shareholders annually in the form of dividends.
- Shares of publicly traded REITs are bought and sold on major stock exchanges, just like regular stocks, providing investors with liquidity and ease of access.
While many REITs are publicly traded on national securities exchanges and readily bought and sold by investors, there are also public non-traded REITs and private REITs. These types of REITs offer different levels of liquidity and are subject to varying regulations. Publicly-traded REITs are subject to regulations and reporting requirements by the U.S. Securities and Exchange Commission (SEC), offering investors enhanced transparency compared to some other real estate investments.
What are the different types of REITs?
There are several different categories of REITs. Depending on the type of investor you are and the investments you gravitate towards, you might find that one or multiple categories of REITs are best suited to your risk preferences and portfolio objectives.
- Equity REITs: These REITs own and manage properties like office buildings, apartments, shopping centers, hotels, and warehouses. They generate income through rental payments from tenants and potentially from selling properties. Equity REITs are the most common type of REIT.
- Mortgage REITs: This type of REIT invests in mortgages and mortgage-backed securities, earning income from the interest on these investments. A mortgage REIT may invest in residential or commercial mortgages, or both. These REITs are highly sensitive to interest rate changes.
- Hybrid REITs: These REITs combine elements of both equity and mortgage REITs, and may own properties while also investing in mortgages or mortgage-backed securities. By diversifying their investments, hybrid REITs aim to be more resilient in different market conditions.
REITs can also be categorized by the type of property they invest in, including office, residential, retail, industrial, healthcare, lodging/resorts, and many other categories. Some REITs may also invest across multiple property types.
