A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.
REITs allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock. In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy or finance property.
Most REITs are traded on major stock exchanges, but there are also public non-listed and private REITs. The two main types of REITs are Equity REITs and Mortgage REITs. Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term. Mortgage REITs invest in mortgages or mortgage securities tied to commercial and/or residential properties.
Today, REITs are tied to almost all aspects of the economy, including apartments, hospitals, hotels, industrial facilities, infrastructure, nursing homes, offices, shopping malls, storage centers, student housing, and timberlands. REIT-owned properties are located in every state and according to an E&Y study, support an estimated 1.8 million U.S. jobs annually. U.S. REITs have become a model for REITs around the world, and now more than 35 countries around the world have adopted REIT legislation.
After the close of trade on Aug. 31, 2016, Equity REITs and other listed real estate companies were transferred from the Financials Sector of the Global Industry Classification Standard (GICS) to a new Real Estate Sector. The change reflected the growing importance of the real estate sector, and is expected to create a larger and more diverse investor base for the REIT industry. Mortgage REITs remained within the Financials Sector.
To qualify as a REIT a company must:
- Invest at least 75 percent of its total assets in real estate
- Derive at least 75 percent of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
- Pay at least 90 percent of its taxable income in the form of shareholder dividends each year
- Be an entity that is taxable as a corporation
- Be managed by a board of directors or trustees
- Have a minimum of 100 shareholders
- Have no more than 50 percent of its shares held by five or fewer individuals
REITs offer investors a number of benefits, including:
- Diversification: Over the long term, Equity REIT returns have shown little correlation to the returns of the broader stock market.
- Dividends: Stock exchange-listed REITs have provided a stable income stream to investors.
- Liquidity: Stock exchange-listed REIT shares can be easily bought and sold.
- Performance: Over most long-term horizons, stock exchange-listed REIT returns outperformed the S&P 500, Dow Jones Industrials and NASDAQ Composite.
- Transparency: Stock exchange-listed REITs operate under the same rules as other public companies for securities regulatory and financial reporting purposes.