At the foundation, a Real Estate Investment Trust (REIT) owns, finances, or invests in real estate or real estate-related assets. Investors can buy shares in REITs as they would invest in equities, but they are purchasing an interest in a real estate portfolio or a particular asset. There are some specific characteristics of REITs, including the following:
There are two primary types of real estate activities performed by REITs (and then a hybrid of the first two): equity focused REITs generate their income from owning and operating real estate assets. In contrast, mortgage REITs earn money through loans and other debt instruments. The third type is the hybrid, which will hold both. A hybrid REIT may seek to reduce risk concentration by spreading its investments across property and mortgage assets.
A traded REIT trades like a share of stock in any other company (think AMZ or APL for comparison), which means it is highly liquid. You can always sell the stake, quickly find out its worth and how the trust is performing. This fact also means there is virtually no minimum investment—just the price of a share.
In contrast, a non-traded REIT is still a security but isn't traded and is therefore illiquid, typically with a minimum holding period and often a high minimum for investment. Since there is no accepted market, assessing a non-traded REIT share value can be more challenging. Non-traded REITs are sometimes called private and may also have higher fees.
The structure as a traded or non-traded trust does not bear on the content, however. Either type can focus on property, financing, or both. In addition, the asset type selection can appear in a property, financing, or hybrid REIT. Whether the investment focus is on multi-family housing, retail (including the many subsectors) and hospitality, or office and industrial does not impede the REIT management from pursuing property, financing, or both.
A REIT that focuses on property seeks to earn income through rental income and increases in the value of the property in the trust. A mortgage REIT borrows funds at the short-term interest rates and invests in longer-term mortgages, and may also invest in mortgage-backed securities and other related financing vehicles. Interest rate fluctuations may impact a mortgage-focused REIT more quickly and sharply than a property REIT, which is why a hybrid model can try to function as a hedging tool.