A REIT is a company that owns, operates or finances income-producing real estate. Modeled after mutual funds, REITs provide all investors the chance to own valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive and revitalize.
REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy, manage or finance property.
Most REITs operate along a straightforward and easily understandable business model: By leasing space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends. REITs must pay out at least 90 percent of their taxable income to shareholders—and most pay out 100 percent.
REITs are real estate working for you. Through the diverse array of properties they own, finance and operate, REITs help provide the essential real estate we need to live, work and play. REITs of all types collectively own more than $3 trillion in gross assets across the U.S., with stock-exchange listed REITs owning approximately $2 trillion in assets. U.S. listed REITs have an equity market capitalization of more than $1 trillion. In addition, more than 80 million Americans invest in REIT stocks through their 401(k) and other investment funds.
- Equity REITs – The majority of REITs are publicly traded equity REITs. Equity REITs own or operate income-producing real estate. The market and Nareit often refer to equity REITs simply as REITs.
- Mortgage REITs – mREITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.
- Public Non-listed REITs – PNLRs are registered with the SEC but do not trade on national stock exchanges.
- Private REITs – Private REITs are offerings that are exempt from SEC registration and whose shares do not trade on national stock exchanges.
Most REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.
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