Frequently Asked Questions About REITs

REITs (real estate investment trusts) are a practical way for all investors to invest in large-scale, income-producing, professionally managed companies that own commercial real estate. Here are answers to fundamental questions about REITs.

How does a company qualify as a REIT?
To qualify as a REIT, a company must comply with several provisions within the Internal Revenue Code that require a REIT to mainly own income-generating real estate for the long term and distribute most of its income to shareholders.

Learn more about those requirements.
What types of REITs are there?
REITs often are classified in one of two categories: equity or mortgage. Equity REITs mostly own and operate income-producing real estate. Mortgage REITs mostly lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities.

Learn more about the types of REITs.
What types of properties do REITs own and manage?
REITs own and manage a variety of property types: neighborhood shopping centers, health care facilities, apartments, single family homes, cell towers, warehouses, office buildings, hotels and others. Most REITs specialize in one property type only, such as shopping malls, timberlands, data centers or self-storage facilities.

Some REITs invest throughout the country or, in some cases, throughout the world. Others specialize in one region or even a single metropolitan area.
How many REITs are there?
The Internal Revenue Service shows that there are about 1,100 U.S. REITs that have filed tax returns.

There are more than 225 REITs in the U.S. registered with the SEC that trade on one of the major stock exchanges—the majority on the NYSE. These REITs have a combined equity market capitalization of more than $1 trillion.
Who invests in REITs?
Everyone. Individual investors of all ages, both in the U.S. and worldwide, invest in REITs. Other typical buyers of REITs include family offices, pension funds, endowments, foundations, insurance companies and bank trust departments.
How do investors own REITs?
Investors own REIT securities directly or through mutual funds or exchange-traded funds.

The majority of U.S. REITs trade on either the New York Stock Exchange (NYSE) or the NASDAQ. Investors may invest in a publicly traded REIT by purchasing shares through a FINRA-registered broker. As with other publicly traded securities, investors may purchase REIT common stock, preferred stock or debt securities.

Learn more about how to invest in REITs.
 
How do shareholders treat REIT dividends for tax purposes?
For REITs, dividend distributions for tax purposes are allocated to ordinary income, capital gains and return of capital, each of which may be taxed at a different rate.

Learn more about taxes and REIT investment.
What are the investment benefits of REITs?
REITs have been total return investments. They historically have provided high dividends plus the potential for moderate, long-term capital appreciation. Additionally, REITs have offered liquidity, portfolio diversification and strong corporate governance. Past performance may not be indicative of future results for any investments, including REITs.

Learn more about the attributes of REITs.
What factors contribute to REIT earnings?
Growth in REIT earnings typically comes from several sources, including higher revenues, lower costs and new business opportunities.

Learn more about the factors that contribute to REIT earnings.
How do REITs measure earnings?
The REIT industry uses net income as defined under Generally Accepted Accounting Principles (GAAP) as the primary operating performance measure. The REIT industry also uses funds from operations (FFO) as a supplemental measure of a REIT's operating performance. Nareit defines FFO as net income (computed in accordance with GAAP) excluding gains or losses from sales of most property and depreciation of real estate.

Learn more about how REITs measure earnings.
What are the differences between listed REITs, public non-listed REITs (PNLRs) and private REITs?
Listed REITs file with the Securities and Exchange Commission (SEC). Shares of their stock trade on national stock exchanges.

PNLRs file with the SEC. Shares of their stock do not trade on national stock exchanges.

Private REITs do not file with the SEC. Shares of their stock do not trade on national stock exchanges.

Learn more about the differences between stock exchange-listed REITs, PNLRs and private REITs.
Do countries besides the United States have REITs?
Yes, more than 35 countries currently have REITs. The majority of REIT laws around the world mirror the U.S. approach to REIT-based real estate investment.

Learn more about the global listed real estate market.
How could changes in the level of interest rates affect the performance of stock exchange-listed REIT share prices?
Like other stock exchange-listed equities, listed REIT share prices are unpredictable over short time horizons for many reasons, including uncertainty regarding the behavior of investors when, among other possible events, measures of economic activity are reported, corporate earnings are announced or the level of interest rates rises or falls. As with all financial investments, the past performance of REITs does not necessarily predict future performance.

With respect to changes in the level of interest rates, many asset prices usually rise (or fall) as the immediate response to a decrease (or increase) in the level of interest rates. This is especially true for assets with future cash flows that are fixed, such as the interest payments from bonds having fixed coupons. If future cash flows are not expected to rise, then increasing interest rates would have a clear negative impact on asset values, including the share prices of listed REITs.

However, changes in the level of interest rates often reflect changes in the level of economic activity, with stronger economic activity often accompanied by growing demands for credit and rising interest rates. In particular, the historical record reveals that share prices of listed equity REITs have more often increased than decreased during periods of rising interest rates. The more frequent occurrence of higher equity REIT share prices during periods of rising interest rates often reflects higher earnings, as an economy that generates stronger earnings is often also accompanied by higher interest rates.

Learn more about REITs and interest rates
Why were REITs created?
Congress created REITs in 1960 to make investments in large-scale, income-producing real estate accessible to average investors through the purchase of equity. In the same way shareholders benefit by owning stocks of other corporations, the stockholders of a REIT earn a pro-rata share of the economic benefits that are derived from the production of income through real estate ownership.

Learn more about the history of REITs in the United States.