A REIT (Real Estate Investment Trust) is an investment vehicle that offers investors a way to gain access to commercial real estate or other real estate-related assets. The original REITs, developed in the early 1960s, primarily focused on property and allowed individual investors to own fractional slices of property they would have been unable to afford on their own.
A REIT that derives its income from property ownership (sometimes called an equity REIT) may hold a range of property assets or focus on one or more sectors, classes, or geographic regions. Typically, these companies seek to earn income through their tenants' rents. Mortgage REITs instead buy mortgages, mortgage-backed securities, and other financial instruments and strive to profit through interest income. Either way, the REIT can pool funds from a large number of investors, allowing small participants to potentially own small portions of commercial properties or financial assets. Although less common, a REIT can also invest in real estate assets and financial instruments like mortgages or mortgage-backed securities.
REITs are structured as “pass-through” companies for federal tax purposes, which means that the corporation doesn’t pay federal income taxes. Instead, each individual trust owner (shareholder) is responsible for reporting taxes on the income they receive as a dividend. To maintain this status, REITs must adhere to these rules:
Many REITs are traded on the major stock exchanges, like other securities. These REITs are easy to value since the market sets the price and are considered liquid investments. Investors can buy as much or little as they wish in most cases and do not need to be accredited to participate. Some REITs are non-traded, however. These investments must still adhere to the same requirements that other REITs follow, but they are harder to value and considered illiquid because of their private nature. Since they are bought and sold privately, they may have minimum holding periods, additional commissions and costs, threshold investment amounts, and other restrictions.
The fact that a security trades on a public exchange does not provide assurance that it is more likely to be successful than a non-traded or private investment. However, it does offer a more straightforward method for potential investors to access information about the specifics of the trust since the sponsors must report the details to the SEC. As with any investment, there are risks, and investors should always consider their individual circumstances.