Real Estate Investment Trust (REIT)
A REIT (Real Estate Investment Trust) invests directly in real estate, either through properties or mortgages, and is traded as a security on a stock exchange. REITs tend to offer investors high yields, and they receive special tax considerations.
- Equity REITs invest in and own properties. Revenue comes principally from their properties' rents.
- Mortgage REITs deal invest in property mortgages. They lend money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Revenues come primarily from the interest that they earn on the mortgage loans.
- Hybrid REITs invest in both properties and mortgages.
Individuals can invest in REITs by buying shares on an exchange or by investing in a mutual fund that specializes in real estate. REITs usually pay dividends and often offer dividend reinvestment plans. Some REITS invest in a specific type of real estate, such as shopping malls or office buildings, or in one specific region.
To qualify as a REIT in the U.S., a company must comply with certain rules specified in the Internal Revenue Code. These include: investing at least 75 percent of total assets in real estate; deriving at least 75 percent of gross income as rents from real property or interest from mortgages on real property; and distributing annually at least 90 percent of taxable income to shareholders in the form of dividends.
Congress created REITs in the U.S. in 1960 as a way to make investment in large-scale, income-producing real estate accessible to all investors in the same way they typically invest otherwise – through the purchase and sale of liquid securities. Before listed real estate equities were created, investing in commercial real estate equity as a core asset was limited to institutions and wealthy individuals with the wherewithal to invest directly in real estate.