What's a REIT (Real Estate Investment Trust)? (2023)

FAQs

What is REIT real estate? ›

Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets.

REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.

*A real estate investment trust (REIT) is a company that pools its capital to purchase properties and/or mortgage loans. Investors buy REIT shares and, in turn, receive dividends from investment income or capital gains distributions. REIT shares are traded on exchanges much like the stocks of other companies.

A real estate investment trust (REIT) is a company that owns, finances or manages properties and then is required by law to pay most of that income to investors. This income can come from the rents that the properties' tenants pay or even from mortgage payments on loans owned by the REIT.

Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.

REITs tend to offer a good yield over and above high-quality bonds and most equities, so they are of particular interest to income seekers, though the combination of income and rental growth can be attractive to all investors.

In the United States, a REIT is a company that owns, and in most cases operates, income-producing real estate. Some REITs finance real estate. To be a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

REITs make their money through the mortgages underlying real estate development or on rental incomes once the property is developed. REITs provide shareholders with steady income and, if held long-term, growth that reflects the appreciation of the property it owns.

Perhaps the biggest advantage of buying REIT shares rather than rental properties is simplicity. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Diversification is another benefit.

REITs vs.

A real estate investment trust (REIT) is a corporation, trust, or association that invests directly in income-producing real estate and is traded like a stock. A real estate fund is a type of mutual fund that primarily focuses on investing in securities offered by public real estate companies.

Do REITs pay dividends? ›

Real estate investment trusts (REITs) have long been a popular investment option for those looking for steady income streams. These trusts are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends, making them a great choice for investors seeking regular cash flow.

The two main types of REITs are equity REITs and mortgage REITs, commonly known as mREITs. Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term. mREITs invest in mortgages or mortgage securities tied to commercial and/or residential properties.

The benefits of a REIT investment include liquidity, diversification, and passive income in the form of high dividends. The potential downsides of a REIT investment include taxes, fees, and market volatility due to interest rate movements or trends in the real estate market.

Summary of Why Investors May Not Want to Invest in REITs

But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.

While numerous types of investments could be considered real assets, our definition includes: Real estate, including real estate investment trusts (REITs). Land and commercial properties including apartments, offices, warehouses, malls, etc. Infrastructure.

While some stocks distribute dividends on an annual basis, certain REITs pay quarterly or monthly. That can be an advantage for investors, whether the money is used for enhancing income or for reinvestment, especially since more frequent payments compound faster.

REITs are well known for their meaty dividends, and the cash income can help provide stability for investors during tougher times in the markets. Those payouts make them popular, especially with older investors. REITs usually offer among the highest yields in the market.

Because of their lower volatility, REIT returns are less correlated to the stock market. That makes REITs an excellent way for investors to build a diversified portfolio and improve their risk and return profile.

The Cheapest Option: REITs—$1,000 to $25,000 or more

Many REITs specialize in a particular type of real estate or a specific region. A REIT offers the investor a relatively high dividend as well as a highly liquid method of investing in real estate. Most real estate investments are not easy or quick to get out of.

Real estate investment trusts (REITs) and exchange-traded funds (ETFs) both offer the potential to earn passive income during retirement. There are even REIT ETFs for investors who want the best of both worlds.

How much money can you make from REITs? ›

Of course, the amount you earn depends largely on the successful management of the REIT, as well as market conditions. A REIT often can provide a reasonable return of 5–10 percent or more.

A REIT can purchase real property directly from a seller for cash or for cash and a note. In this case, after the sale, the seller has no ownership interest in the REIT. As an alternative, the seller of property such as dealer, can transfer his property to the REIT in return for REIT shares.

(That's one reason REITs can be a great fit for IRAs.) Non-traded REITs can be expensive: The cost for initial investment in a non-traded REIT may be $25,000 or more and may be limited to accredited investors. Non-traded REITs also may have higher fees than publicly traded REITs.

REIT properties are critical to the economy. There are approximately 535,000 REIT-owned properties, which include data centers, hospitals, hotels, housing, industrial facilities, offices, shopping centers, malls, free-standing retail, storage centers, telecommunications infrastructure, and timberlands.

There are several other worthwhile stocks and real estate investment trusts (REIT) that have massive potential for millionaire status. Here's why cannabis REIT Innovative Industrial Properties (NYSE: IIPR) could be a great candidate to help you retire as a millionaire.

How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

REITs—or real estate investment trusts—are corporations that act like mutual funds for real estate investing. You can invest in a REIT without having to own or manage any property yourself. Alternatively, you can go the direct real estate investing route and buy residential or commercial properties.

When you invest in a REIT, you enjoy the limited liability of being a minority shareholder of a publicly listed company. This means that you cannot lose more than you invest. You are not signing on any of the loans and tenants, contractors, etc., won't sue you for being a shareholder.

REITs generally come in three types, each with its own characteristics and potential benefits. These REIT classifications are publicly traded REITs, public non-listed REITs (PNLRs), and private REITs. According to IRS requirements, all REITs must distribute at least 90% of their net income to investors as dividends.

Are REITs better than physical real estate? ›

REITs can be a good choice because: Buying and selling REIT shares is easier than it is with a physical property. They obviate the need for market-specific knowledge and property management while making it easier to diversify your real estate portfolio.

REITs should generally be considered long-term investments

In many cases, this can take around 10 years to occur. And with publicly traded REITs that fluctuate with the stock market, Jhangiani recommends holding onto them for at least three years.

The five largest REITs in the United States in 2021 are: American Tower Corporation, Prologis, Crown Castle International, Simon Property Group and Weyerhaeuser.

Overview. A REIT is taxable as a regular corporation, but is entitled to the dividends paid deduction. Therefore, a REIT does not pay federal income tax on net taxable income distributed as deductible dividends to shareholders. Net income from foreclosure property is taxed at 35 percent.

An equity REIT is the most common type of REIT. An equity REIT owns and operates the properties in its holdings. With that, an equity REIT often generates revenue through rental income.

Equity REITs are the most popular REITs. These companies are publicly traded, meaning you can buy and sell shares on major stock exchanges like you would any other stock. Because they are publicly traded, equity REITs must be registered with the SEC and are subject to its regulations.

REITs are a great way to add real estate to your investment portfolio. June 16, 2023, at 4:35 p.m. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify a portfolio.

Interest Rates. During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.

When you buy shares of a REIT, you own a perpetual stake in an expanding real estate operation that hopefully pays steadily rising dividends as it grows in value over time. Bonds are a fixed-income asset that is lower risk due to its preferred position in the capital stack.

REITs have many built-in tax efficiencies for investors. For example, they do not pay corporate income taxes, return of capital distributions are tax-deferred and REIT investors can deduct 20% of their dividends earned for the qualified business income deduction.

What happens when a REIT sells a property? ›

Capital gains distributions occur when a REIT sells real estate assets and realizes a profit. Unlike ordinary dividends, these distributions are treated like any other capital gain and subject to preferential rates.

Put simply, Reits are property companies with tax benefits. They don't need to pay capital gains tax on property sales, and there's no tax on rental income as long as 90% of income earned from rents is returned to shareholders. These benefits make Reits an incredibly tax-efficient strategy for investing in property.

The potential downsides of a REIT investment include taxes, fees, and market volatility due to interest rate movements or trends in the real estate market. REITs tend to specialize in specific property types.

There's much to be said for investing in REITs. They're more liquid than physical properties and can be a steady source of income. They appreciate (and can depreciate) along with the broader real estate market, and allow you to hedge against stock market volatility.

Publicly traded REITs offer investors a way to add real estate to an investment portfolio and earn an attractive dividend. Publicly traded REITs are a safer play than their non-exchange counterparts, but there are still risks.

Summary of Why Investors May Not Want to Invest in REITs

But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.

Real estate investment trusts, or REITs, are generally a great place to turn for safe and attractive dividend income. This is because they benefit from zero corporate taxation and are required by law to pay out at least 90% of taxable income as dividends to their shareholders.

While some stocks distribute dividends on an annual basis, certain REITs pay quarterly or monthly. That can be an advantage for investors, whether the money is used for enhancing income or for reinvestment, especially since more frequent payments compound faster.

The Cheapest Option: REITs—$1,000 to $25,000 or more

These are securities and are traded on major exchanges like stocks. They invest in real estate directly, either through property purchases or through mortgage investments. Many REITs specialize in a particular type of real estate or a specific region.

What is better than REITs? ›

Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making. Many REITs are publicly traded on exchanges, so they're easier to buy and sell than traditional real estate.

How do I Invest in a REIT? An individual may buy shares in a REIT, which is listed on major stock exchanges, just like any other public stock. Investors may also purchase shares in a REIT mutual fund or exchange-traded fund (ETF).

As of March 15, 2023 publicly traded U.S. equity REITs posted a one-year average dividend yield of 3.49 percent.

After looking at correlation patterns and historical data, it appears that returns from REITs vary during different interest rate periods, but for the most part have shown a positive correlation during increasing interest rates.

Private REITs

Private REITs may have an investment minimum, and that typically runs from $1,000 to $25,000, according to NAREIT, the National Association of Real Estate Investment Trusts. Risk: Private REITs are often very illiquid, meaning it can be difficult to access your money when you need it.