Real Estate Investment Trust - REIT

Loading the player...

What is a 'Real Estate Investment Trust - REIT'

A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock. REITs provide investors with an extremely liquid stake in real estate. They receive special tax considerations and typically offer high dividend yields.

BREAKING DOWN 'Real Estate Investment Trust - REIT'

REITs, an investment vehicle for real estate that is comparable to a mutual fund, allowing both small and large investors to acquire ownership in real estate ventures, own and in some cases operate commercial properties such as apartment complexes, hospitals, office buildings, timber land, warehouses, hotels and shopping malls.

All REITs must have at least 100 shareholders, no five of whom can hold more than 50% of shares between them. At least 75% of a REIT's assets must be invested in real estate, cash or U.S. Treasurys; 75% of gross income must be derived from real estate.

REITs are required by law to maintain dividend payout ratios of at least 90%, making them a favorite for income-seeking investors. REITs can deduct these dividends and avoid most or all tax liabilities, though investors still pay income tax on the payouts they receive. Many REITs have dividend reinvestment plans (DRIPs​), allowing returns to compound over time.

REIT History

REITs have existed for more than 50 years in the U.S. Congress granted legal authority to form REITs in 1960 as an amendment to the Cigar Excise Tax Extension of 1960. That year The National Association of Real Estate Investment Funds, a professional group for the promotion of REITs is founded. The following year it changed its name to the National Association of Real Estate Investment Trusts (NAREIT).

In 1965 the first REIT, Continental Mortgage Investors, is listed on the New York Stock Exchange (NYSE). By the late 1960s, major investors, including George Soros, become interested in research on the value of REITs. Mortgage based REITs account for much of the growth of REITs in the early 1970s, and they fuel a housing boom. The boom busts after the oil shocks of 1973 and the recession that follows.

In 1969 the first European REIT legislation (the Fiscal Investment Institution Regime [fiscale beleggingsinstelling: FBI]) is passed in The Netherlands.

International REITs

​Since their development in Europe, REITs have become available in many countries outside the United States on every continent on Earth. 

The first listed property trusts launch in Australia in 1971.

Canadian REITs debut in 1993, but they don't become popular investment vehicles until the beginning of the 21st century. 

REITs began to spread across Asia with the launch of Japanese REITs in 2001.

REITs in Europe were buoyed by legislation in France (2003), Germany (2007) and the U.K. (2007). In total, about 40 countries now have REIT legislation.

3 Main Kinds of REITs in the U.S.

1. Equity REITs invest in and own properties, that is, they are responsible for the equity or value of their real estate assets. Their revenues come principally from leasing space—such as in an office building—to tenants. They then distribute the rents they've received as dividends to shareholders. Equity REITs may sell property holdings, in which case this capital appreciation is reflected in dividends. Timber REITs will include capital appreciation from timber sales in their dividends. Equity REITs account for the vast majority of REITs.

2. Mortgage REITs invest in and own property mortgages. These REITs loan money for mortgages to real estate owners, or purchase existing mortgages or mortgage-backed securities. Their earnings are generated primarily by the net interest margin, the spread between the interest they earn on mortgage loans and the cost of funding these loans. This model makes them potentially sensitive to interest rate increases. In general, mortgage REITs are less highly leveraged than other commercial mortgage lenders, using a relatively higher ratio of equity to debt to fund themselves.

3. Hybrid REITs invest in both properties and mortgages.

Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. Some REITs are SEC-registered and public, but not listed on an exchange; others are private.

Some REITs will invest specifically in one area of real estate—shopping malls, for example—or in one specific region, state or country. Others are more diversified. There are several REIT ETFs available, most of which have fairly low expense ratios. The ETF format can help investors avoid over-dependence on one company, geographical area or industry.

REITs provide a liquid and non-capital intensive way to invest in real estate. Many have dividend yields in excess of 10%. REITs are also largely uncorrelated with stocks and bonds, meaning they provide a measure of diversification.

Need more details on the REIT? Read The REIT Way and Add Some Real Estate to Your Portfolio.

RELATED TERMS
  1. REIT ETF

    Exchange-traded funds that invest the majority of assets in equity ...
  2. Funds From Operations Per Share ...

    A metric for the performance of a real estate investment trust ...
  3. Captive Real Estate Investment ...

    A real estate investment trust (REIT) that is controlled by a ...
  4. Funds Available For Distribution ...

    An informal measure of the amount of capital that is on hand ...
  5. Non-Traded REIT

    A form of real estate investment method that is designed to reduce ...
  6. Finite-Life REIT - FREIT

    A real estate investment trust (REIT) that aims to sell its real ...
Related Articles
  1. Options & Futures

    20 Investments: Real Estate Investment Trusts (REITs)

    What Is It? What if you want to invest in the real estate sector, but you either already have a house or don't have enough money to buy one right now? The answer is REITs. REITs sell like stocks ...
  2. Mutual Funds & ETFs

    REITs vs. REIT ETFs: How They Compare

    Learn about the difference in investing in a REIT for a single real estate company versus investing in a REIT ETF that tracks a larger REIT index.
  3. Investing

    What Is a REIT and Does It Belong in My Portfolio?

    Real estate investment trusts offer a unique way for investors to own a real estate portfolio without the risks of owning single properties.
  4. Bonds & Fixed Income

    Are REITs Beneficial During A High-Interest Era?

    Amid expectations of high interest rates, do REITs offer a viable investment option? Investoepdia studies the historical data to decide.
  5. Stock Analysis

    REITs Could be Affected by Higher Interest Rates

    Learn how REITs may be impacted by an increase in interest rates, and understand why certain types of REITs could benefit from higher rates.
  6. Products and Investments

    REITs: Still a Viable Investment?

    Are REITs viable investments now? Here's a look at the history of REITs' performance during rocky economic times and other factors that may impact returns.
  7. Mutual Funds & ETFs

    Equity And Mortgage REITs

    Equity And Mortgage REITs
  8. Investing

    REITs 101: How They're Regulated

    Here's everything you need to know about REITs in less than five minutes.
  9. Professionals

    Real Estate Investments

    NASAA Series 65: Section 10 Real Estate Investments. In this section real estate investment trust (REIT), equity REIT, mortgage REIT, Reit Taxation and real estate limited partnership.
  10. Investing Basics

    The Basics of Reinvesting REIT Dividends

    Learn the essentials of dividend reinvestment in real estate investment trusts and how a dividend reinvestment plan can magnify your long-term returns.
RELATED FAQS
  1. What is the difference between a REIT and a real estate fund?

  2. What are the pros and cons of owning an equity REIT versus a mortgage REIT? (AEC, ...

    Learn about investing in equity, mortgage and hybrid REITs. Explore the different strategies REITs employ to generate income ... Read Answer >>
  3. What is the difference between an Equity REIT and a Mortgage REIT?

    Find out more about real estate investment trusts and the main differences between equity and mortgage real estate investment ... Read Answer >>
  4. What are the potential pitfalls of owning REITs?

    Learn about pitfalls to investing in REITs, such as investors having to pay income tax, the REIT having to pay property tax ... Read Answer >>
  5. Can mutual funds invest in REITs?

    Learn about mutual funds that invest in real estate investment trusts and have their shares traded on major U.S. stock exchanges ... Read Answer >>
  6. Is NAV the best way to assess the value of an REIT?

    Examine and understand the usefulness of net asset value as an accurate metric with which to assess the value of a REIT investment. Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center