A REIT is a Real Estate Investment Trust. This fractional investment structure provides an opportunity for investors to participate in commercial real estate without being involved in the actual management or maintenance of the property. REITs own, operate, or finance properties intending to earn income for their investors. They work like mutual funds. The REIT Act was part of the Cigar Excise Tax Extension of 1960, passed by Congress and signed by President Eisenhower to broaden access to real estate investing. REITs were advanced further with the Tax Reform Act of 1986, which enabled REITs to operate and manage real estate in addition to owning or financing it.
According to the National Association of Real Estate Investment Trusts (NAREIT), 145 million Americans own REIT stocks, either directly or indirectly. Furthermore, forty countries allow REIT investments, expanding the industry across the globe.
The REIT Act was passed in 1960, and the first investments to be packaged into trusts were community shopping centers and malls in 1961. Lodging and resort projects followed in 1970, then apartments, warehouses, and distribution facilities in 1971. Central business district office buildings were added to the offerings in 1972, racetracks in 1980, storage projects in 1986, and suburban office parks in 1988. REITs have added more sectors in subsequent years and today represent all commercial property options.
Some REITs invest in financial instruments related to property rather than the actual real estate. These are referred to as mortgage REITs (or mREITs). These companies operate like financial stocks and typically own mortgages, mortgage-backed securities, and other financial assets.
REITs are tax-advantaged, pass-through corporations, which means that the company doesn’t pay federal income taxes at the corporate level. Instead, it passes income through to the investors, who then pay income tax. To maintain that status, a REIT must meet these structural requirements:
Many REITs are publicly traded, which means investors can buy them like stocks, so they offer easy access and disposition. Owning a REIT gives an investor the ability to enjoy the benefits of real estate investment without having significant capital and without management responsibility. In addition, REITs seek to provide steady cash flow for investors.
However, REITs can be volatile like other stocks, and the dividends may be taxed at a higher rate than other income. In addition, owning non-traded or private REITs has additional risks since the Securities and Exchange Commission does not supervise those products.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.