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Definition
A Real Estate Investment Trust (REIT) is a company that owns and operates income properties, collecting rent from residential or commercial tenants. Taking a page from mutual funds, REITs have a pool of investors behind them who take a portion of the profits generated by these properties.
REITs invest in different kinds of real estate using funds from a pool of investors. They then distribute the earnings from these investments among the initial investors, retaining a small percentage for themselves.
They operate similarly to mutual funds in form and function. The main difference is that a mutual fund buys stock in many other companies with the money from its pool of shareholders. The fund then distributes the earnings from its investments among shareholders, keeping a portion of those earnings for itself.
You might be thinking that a REIT is essentially a landlord that collects rent from residential tenants. While REITs do invest in apartment buildings, they also invest in offices, warehouses, malls, hospitals, hotels and many other types of properties. There are also mortgage REITs (mREITs), which do not generate income from rent but rather from financing properties for borrowers. Finally, there are hybrid REITs, which do both these things. By law, REITs must pay out 90% of their income to shareholders in the form of dividends.
Compared with traditional real estate investments, REITs offer several advantages.
On the other hand, there are several potential disadvantages to investing in a REIT.
Investing in a REIT is comparable to investing in stocks or bonds. Although there are public, non-listed and private REITs, most REITs are publicly traded on major stock exchanges. In addition, just like with stocks, there are REIT mutual funds and Exchange Traded Funds (ETFs) in which investors can buy shares.
Does investing in a REIT make you a real estate mogul? Absolutely not. The owners of the real estate in question will always be the REIT, so any claim that REITs are somehow an easy way to get into real estate should be taken with a pinch of salt. However, in a well-managed portfolio, REITs can add an extra layer of diversification.
Not every asset is right for everyone, so make sure you study any potential investment meticulously and, if needed, consult with a professional advisor.
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