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Invest | A Detailed Overview: Real Estate Investment Trusts(REIT)

A Detailed Overview: Real Estate Investment Trusts(REIT)

Real Estate Investment Trust

Real estate investment trusts (REIT) are a form of real estate investing in a commercial property of the real estate without buying and managing these properties by yourself. Sounds interesting? Stay with us, we have exceptional and informative insights into this beneficial investing source to help you fund your future with great returns received via dividends. 

REITs are gaining popularity among investors who have been actively looking to expand their diversified portfolios over publicly traded stock or mutual funds. In short, REITs are companies that operate and own real estate that generates income. For instance, it can be a warehouse, apartments, hotels, hospitals, or even self-storage facilities, and more. The most reliable REIT is the one that keeps track of making payments on large and growing dividends. However, like every investment instrument, REITs too have a significant amount of risk which can vary from the type of REIT that you opt for to the types of REIT investment. 

Additionally, REITs often issue shares that trade on stock exchanges and are usually bought and sold by investors similar to stocks. If a company desires to be considered as a REIT, then they need to invest 75% of its assets in real estate and meet other requirements ( we discuss later in the blog). 

Are you looking forward to investing in REITs? You have ended up on the right site. This blog will walk you through the insights of investments in the real estate industry and clear out your concerns like  What are REIT dividends? How do REITs make money? Are REITs liquid? And how does REIT work?

What is Real Estate Investing?

A real estate investment trust (REIT) is a company that is known for owning, financing, and operating income-generating real estate. 

Adapted after mutual funds, REIT collects the capital of various investors. This alternative benefits individual investors who wish to earn dividends from investing in real estate. Though, the highlighting perk here, you don't have to buy, manage or even finance any of these properties.  

Key Elements to Consider about REITs

  • REITs are known for generating stable income sources for investors but often offer little advantage in terms of capital appreciation. 
  • REITs invest in most real-estate property types, like apartments, data centers, medical facilities, hotels, retail centers, warehouses, offices, and more. 
  • You will find most REITs to be publicly traded similar to stocks, making it a reliable liquid option - unlike physical real-estate investment. 
  • REIT is a company that produces income through investing in the real estate industry through owning, financing, and operating properties. 

How does a REIT work?

Before we start discussing how does a REIT work, let’s understand how REITs were established. In 1960, REIT rules were introduced by Congress as an amendment to Cigar Excise Tax Extension. This provision allowed investors to buy shares in commercial real estate portfolios. However, this was an exclusive investment instrument back then, as it was only available for wealthy individual investors and through large intermediaries like brokers or financial professionals. 

Though, properties in a REIT-based portfolio can involve complexes, apartments, data centers, infrastructure in the form of fiber cable, energy pipelines, cell towers, timberland, retail centers, and more. 

Investors interested in REIT must ensure that these companies specialize in a specific sector of real estate. For instance, a REIT can be specified in the retail and office sector. 

Additionally, numerous REITs are publicly traded majorly on securities exchanges, and investors can consider buying and selling securities like stocks through trading sessions. Note that, these sessions are conducted at a substantial level and are considered as liquid investing instruments. 

Are REITs liquid?

Yes, as we discussed above Real Estate Investment Trusts (REITs) are considered as one of the ideal and liquid investment instruments. REITs are traded on major stock exchanges, which means investors can buy or sell on any trading day. Liquidity in real-estate investments makes it relatively easy for investors to convert their REIT holdings into cash. 

However, it is essential to keep in mind while REITs are liquid, their prices may be subject to market fluctuations, just like stocks. The liquidity of a specific REIT can also depend on its trading volume. Highly traded REITs with major investor interest are more likely to have higher liquidity, while less popular or smaller REITs might have lower liquidity.

Investors should be aware that liquidity will not guarantee a stable price, and REIT prices can experience short-term volatility. As with any investment, it's important to consider your investment goals, risk tolerance, and investment horizon when deciding to invest in REITs. 

How can a company qualify for real estate investing?

Most REITs have a straightforward and streamlined investment model, to initiate the process, REIT will lease the space and collect rents for the properties then distribute the income earned to the shareholders in the form of dividends. However, note that Mortgage REITs do not own real estate rather they finance varied types of real-estates. Mortgage REITs generate income through the interest on real-estate investments. 

Though, most individuals have often queries like how does a company qualify for REIT? A company must meet a few provisions in the Internal Revenue Code (IRC). The ideal requirements of REIT companies include - how REITs make money primarily. The income is earned through generating real estate for the long term and sharing this income with shareholders. Sounds confusing? Don’t worry, let’s have a closer look at vital requirements for a company to be considered as a REIT. 

  • A company must invest at least 75% of its assets in real-estate, US treasury, or cash.
  • Must pay 90% of taxable income as a requirement for sharing income with shareholders in the form of dividends. 
  • Must derive a minimum of 75% as gross income from rents, interest earned from a mortgage that finances real-estate properties, or even real-estate sales. 
  • A company must be managed by a board of directors or trustees. 
  • Must be an entity that is taxable as a corporation. 
  • A company must have at least 100 shareholders after the first year of its existence. 
  • A company should not have more than 50% of its share held by 5 or fewer shareholders. 

Types of REITs

To understand more about real estate investments, being well-versed with types of REITs is extremely important to have a successful investment experience. 

Equity REITs

The majority of REITs and Equity REITs are owned and managed income-generating real estate properties. Often, individuals wonder how REITs make money. Usually, the revenues are earned majorly through rents and not by reselling properties. 

Hybrid REITs

Majorly Hybrid REITs utilize the investment strategies of Mortgage and Equity REITs. 

Mortgage REITs

Mortgage REITs often lend money to real estate owners and operators either through mortgages and loans or indirectly through the accession of mortgage-backed securities. 

Though, the earnings of these REITs are generated through net interest margin. Which is the spread between the interest they earn through mortgage loans and the cost of funding these loans. However, this REIT type makes real-estate owners sensitive to interest rate increases. 

Still confused about the differences between the REITs types? Let’s make it simple for you, we have listed below the distinctive factors of real-estate investment types. 

REITs TypesSpecific Holdings
Equity REITsOwned and operates income generating real-estates
Hybrid REITsOwned properties and holding mortgages
Mortgage REITsHolding mortgages on real properties

That’s not the only type, to understand how do REITs make money. You need to make yourself aware of more categories as per shares being held or sold. Let's explore these factors in more detail. 

Publicly Traded REITs

On the National Securities Exchange, wherein shares are bought and sold by individual investors, which are publicly traded REIT shares listingsAdditionally, publicly traded REITs are regulated by the US Securities and Exchange Commission (SEC). 

Private REITs

These types of REITs are not registered with the SEC and they do not trade on national securities exchange. Private REITs can often merely be sold to institutional investors. 

Public Non-Traded REITs

This category of REITs is registered with the SEC but they don't trade with the national securities exchange. This is the reason, it is considered less liquid than publicly traded REITS, comparatively. Though, according to investors this alternative is considered as stable because they are not subject to market fluctuations. 

Top-Performing REIT stocks

Are you wondering about the top options to invest in REIT stocks? We’ve got you covered! We are listing below the top-performing publicly listed REITs as of August 2023. 

SymbolREIT CompanyREIT performance 1 year total return Share price
SKCTanger Outlets 53.5%$23.32
VREVeris Residential, Inc32.59%$18.55
SVCService Properties Trust42.1%$8.41
UBAUrstadt Biddle Properties, Inc29.9%$22.44
IRMIron Mountain32%$60.56

Top Performing REIT ETFs

SymbolETF NameYear to date return percentageExpense ratio
HAUSResidential REIT Income ETF9.2%0.60
REZiShares Residential and Multisector Real Estate ETF8.3%0.48
NURENuveen Short-Term REIT ETF8.7%0.35%
RWRSPDR Dow Jones REIT ETF8%0.25%
PPTYU.S. Diversified Real Estate ETF8.1%0.53

Top performing REIT Mutual Funds

SymbolFund nameYear to year return percentageExpense ratio
BREIXBaron Real Estate Institutional18.6%1.07%
BREFXBaron Real Estate Retail18.4%1,33%
BREUXBaron Real Estate R618.6%1.07%
SIIXAlphaCentric Strategic Income13.51%1.51%
CNREXCommonwealth Real Estate Securities15.3%2.6%

Perks and downsides of real estate investing

REITs can aid you in enhancing your investment portfolio because they provide consistent, robust annual dividends and an opportunity of long-term capital growth. However, during the past 20 years, the total return performance of REITs has outpaced that of the S&P 500 Index, other indices, and even inflation. Though, as an investment REITs have their perks and downsides.

REITs are easy to buy and sell because most trade on public exchanges - a highlighting feature that mitigates a few traditional real-estate investments. Additionally, REITs offer amazing risk-adjusted returns and stable cash flow. Having a real-estate stock in your portfolio can serve as a great benefit as it offers diversification and dividend-based income. Isn’t that interesting? Also, dividends are higher in REITs than that you achieve in other investment instruments. 

As a bonus point, the Tax Cuts and Job Act of 2017 permits taxpayers to benefit from the qualified business income (QBI) deduction. The deduction is the QBI plus 20% of qualified REIT dividend or 20% of taxable income minus net capital gains. 

However, the downside includes - as per REITs rules, they do not offer much in terms of capital appreciation. As a part of the determined structure, companies must pay 90% of their income back to the investors. This means, only 10% of taxable income can be reinvested in REIT to buy new holdings.

List of Perks and Downsides

Perks of REITsDownsides of REITs
It has more liquidityComparatively has lower growth
Dividends are usually taxed as per regular incomeDIvidends are usually taxed as per regular income
Provides stable cash flow through dividends to investorsIt is subject to market risk and fluctuations
Offers transparencyHigher transactional and management fees
Offers great risk adjusted returns t individual investors-

How to prevent experiencing REIT Fraud?

Investors should be wary of anyone trying to sell them REITs without being registered with the Security and Exchange Commission (SEC), the Security and Exchange Commission (SEC) advises. However, you can verify the registration of publicly traded and non-traded REITs via the SEC's EDGAR system. Additionally, you can utilize EDGAr to review REIT quarterly and annual reports. 

Also, it is advisable to check with a broker or investment advisor who has suitable experience and recommends REITs for investment. Or you can opt for other alternatives like SEC offers a free search tool that permits you to determine whether a specific investment professional has been registered or has a license or not. 

How to Start Off Investing in REIT?

Are you confused about how I can start my investing journey with REIT? It’s pretty simple.

As opening a brokerage account - which barely consumes a few minutes. Once you have your account ready, you will be able to buy or sell publicly-traded REITs just like trading stocks. Since REITs pay large dividends to investors, often investors strategize their investing by keeping in tax advantage accounts for instance IRA so that they can defer from paying taxes on distributions. 

If you wish to not trade with REIT stocks, your ideal alternative should be mutual funds or ETF investments which helps you to vet and invest in REITs. This can serve as a beneficial step, as you get instant diversification and lower risk in your investment journey. These funds are also available from many brokers, and investing in them requires less work than evaluating and categorizing individual REITs. 

REIT and Dividends

As per the law and IRS regulation, REITs need to payout 90% or more of their tax profits to their shareholders as dividends. This is the reason why most REITs are exempt from most corporate tax. Shareholders of REITs that receive dividends are taxed as a regular income. 


Bottom Line

Your portfolio can benefit from diversity through real estate investment, and it's easy to get started. REITs are all about investing in commercial properties without buying or managing them physically. Investors can benefit from high dividend rates and long-term growth opportunities with varied REIT types, and categories. 

Frequently Asked Questions

Q.1 How do REITs make money?

Rental income from the properties that REITs (Real Estate Investment Trusts) own and manage is how REITs generate revenue. Property appreciation, sales, and other real estate-related activities also bring in money for them. They are a well-liked option for investors looking for real estate exposure without physically owning properties. They are mandated to release a sizable amount of their profits to shareholders as dividends.

Q.2 What are REIT dividends?

Real Estate Investment Trusts (REITs) regularly distribute their profits to their stockholders in the form of REIT dividends. These dividends are derived from the rental revenue and other profits made by the assets that the REIT owns and manages. REITs are appealing to investors looking for income from real estate assets. So they are legally compelled to deliver a sizable amount of their earnings to shareholders in the form of dividends.