What Are REITs? Check All The Details Here For Your Next Investment Plan

Many REITs are publicly traded on major securities exchanges, enabling investors to buy and sell them like stocks throughout the trading day

A real estate investment trust (REIT) is a corporation that owns, operates, or finances income-generating real estate properties. Like mutual funds, REITs gather capital from investors who receive dividends based on the income generated from these real estate investments. Unlike traditional property ownership, REIT investors do not individually purchase, manage, or finance specific properties.

How Does It Work?

REIT was launched in 1960 through an amendment to the Cigar Excise Tax Extension, allowing investors to purchase shares in commercial real estate portfolios that were previously accessible mainly to affluent individuals and large financial intermediaries.

These portfolios cover a variety of property types such as apartment complexes, data centres, healthcare facilities, hotels, infrastructure (including fibre cables, cell towers, and energy pipelines), office buildings, retail centres, self-storage units, timberland, and warehouses. REITs typically specialise in specific real estate market sectors, though diversified and speciality REITs may hold various property types within their portfolios.

Many REITs are publicly traded on major securities exchanges, enabling investors to buy and sell them like stocks throughout the trading day.

The REIT leases out space, collects rent from its properties, and distributes this income to shareholders as dividends. Unlike traditional REITs, mortgage REITs do not own real estate but instead provide financing for real estate investments, earning income primarily from interest on these loans. Any long-term capital gains retained by the REIT are reported to shareholders through IRS Form 2439.

Types Of REIT

There are three types of REITs, including Equity REITs, which constitute the majority of REITs. Equity REITs focus on owning and operating income-generating real estate properties. They primarily generate revenue through rental income rather than property sales.

Mortgage REITs, on the other hand, provide financing to real estate owners and operators directly through mortgages or loans or indirectly by acquiring mortgage-backed securities. Their earnings primarily derive from the net interest margin—the difference between the interest earned on mortgage loans and the cost of financing these loans. This model exposes them to potential sensitivity to changes in interest rates.

Hybrid REITs combine the investment strategies of both equity and mortgage REITs.

Investment In REIT

Investors have options such as publicly-traded REITs, REIT mutual funds, and REIT exchange-traded funds (ETFs). Shares of non-traded REITs can be purchased through brokers or financial advisors participating in the REIT's offering. Publicly Traded REITs have their shares listed on national securities exchanges, enabling individual investors to buy and sell them. These REITs are subject to regulation by the US Securities and Exchange Commission (SEC).

REITs specialise in owning or financing income-generating real estate across various sectors, including healthcare facilities and warehouses. To qualify as REITs, these companies must adhere to specific regulatory requirements. The majority of REITs are listed and traded on major stock exchanges.