Is a Real Estate Investment Trust (REIT) Right for You?

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A real estate investment trust (REIT) can be an attractive way to invest in real estate. It allows anyone to invest in real estate assets arranged in a portfolio. Currently, about 87 million Americans invest in these types of stocks.

What is a REIT? 

A REIT is a company that operates, finances and/or owns real estate that produces income. It provides its investors with the opportunity to own real estate so they can access an income that is dividend based. Investors in REITs also have a hand in enhancing communities by helping them grow and thrive. 

How a REIT Works

In addition to the fact that REITs are much like any other type of stock, they also tend to follow a methodical business model. The company leases space while collecting rent on the real estate it owns. The income generated by these actions is paid to shareholders.

In order to meet the qualifications for being a REIT, the company is required to pay out at least 90 percent of its taxable income to its shareholders. In many cases, REITs pay out a full 100 percent. Shareholders are required to pay income tax on their dividends. 

In contrast, mREITs (mortgage real estate investment trusts) don't own any real estate directly. They earn an income on the interest the is generated when they finance investments. 

Properties REITs Invest In

The types of real estate properties that a REIT can invest in spans a range of options. These are categorized into 13 different sectors and include residential, retail, healthcare, timberland and more. While most REITs invest in a single sector, there are those that hold more than one type of property. 

Types of REITs

There are four general types of REITs. The most common are equity REITs. These operate and/or own real estate that generates income. mREITs focus on providing financing for real estate by originating or purchasing mortgage-related products. 

Public non-listed REITs are registered with the SEC, but don't trade on the stock exchanges like the two previous types of REITs mentioned. Private REITs also do not trade on the stock exchanges. In addition, they are exempt from having to register with the SEC. 

Getting Started Investing in REITs

Investing in REITs is as easy as purchasing shares of a company that's listed on a stock exchange. Other options for investing in a REIT include buying shares in an exchange-traded fund or a mutual fund that focuses on REITs. Investors also have the option to invest in private REITs and REITs that are public but not listed on the stock exchanges. 

While REITs have historically outperformed a number of United States benchmarks, it's important to speak with an investment advisor or financial planner who can provide guidance and targeted information specific to your location and goals.