Understanding Real Estate Investment Trusts

What is a REIT?

A real estate investment trust, or REIT, is a company that combines the capital of many investors to acquire or provide financing for a diversified portfolio of real estate investments under professional management. REITs are required by law to pay distributions to stockholders of at least 90 percent of their annual taxable income.

Congress created REITs in 1960 to allow individuals the opportunity to invest in large-scale commercial properties-expensive assets that typically had been owned by institutions and the very wealthy. The REIT industry has grown dramatically in size and importance since that time.

Types of REITs

Real estate investment trusts typically come in three varieties:

• Equity REITs (which directly own properties)
• Mortgage REITs (which provide loans to property owners)
• Hybrid REITs (which invest in both properties and loans)

REITs At-A-Glance

Real estate investment trusts, or REITs, are companies that:

• Pool the capital of many investors to acquire or provide financing for real estate.
• Allow individuals to invest in a diversified real estate portfolio managed by a professional management team.
• Are required to pay distributions to investors of at least 90 percent of their taxable income (excluding net capital gains) each year.

Traded vs. Non-Traded REITs

Many REITs trade on a stock exchange, such as the NYSE and NASDAQ. They are liquid investments that may be bought and sold daily, and whose prices fluctuate with the market.

Non-traded REITs are similar in structure to their traded counterparts, but do not trade on an exchange. As a result, non-traded REITs are generally illiquid investments.

Both traded and non-traded REITs are regulated by the U.S. Securities & Exchange Commission.