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The term Real Estate Investment Trust, or REIT, was coined in 1960 by the US Congress to describe a special tax-advantaged vehicle for collective real estate investments.
Today, real estate investment trusts are not limited to the US, as more than 30 countries from Germany to Australia have adopted similar regulation.
How does a REIT work?
REIT definition
A REIT is a company that owns, operates, or finances income-generating real estate.
These holdings can be apartments, shopping malls, hotels, self-storage facilities and many other types of real estate. Most REITs concentrate on one type of real estate, while some cover multiple property types.
Most REITs are publicly traded on stock exchanges. They present an easy way for investors to buy shares in real estate portfolios without actually having to go out and purchase, manage or finance properties themselves.
Investing in real estate through a REIT has the benefit of quick liquidity: if you own a rental property and need cash fast, you wouldn’t be able to sell a part of the apartment in less than a minute, while with a REIT investment, you can sell part or all of your holding any day the stock market is open.
In the US, REITs are structured as corporations, but they are exempt from corporate income tax. A company must meet the following standards to qualify as a REIT:
- Invest at least 75% of total assets in real estate, cash or US Treasuries
- Derive at least 75% of gross income from real property rents, interest on mortgages that finance real property rents, or real estate sales
- Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
- Have a board of directors or trustees
- Have a minimum of 100 shareholders after the first year of existence
- Have no more than 50% of its shares held by five or fewer individuals
As you can see, some of these rules were created to protect retail investors.
How does a REIT work?
Types of REITs
Equity vs. Mortgage REITs Explained
Most real estate investment trusts fall into the category of equity REITs. These function much like traditional landlords, as they own, manage, and often develop income-generating properties such as shopping centers, office spaces, or apartment complexes.
They generate revenue by leasing out these properties and collecting rent. A significant portion of this rental income is then distributed to shareholders as dividends. This steady income stream makes equity REITs particularly attractive to investors seeking regular returns, especially those approaching retirement who prioritize income over growth.
In general, equity REITs tend to provide relatively high dividend yields in today’s low-interest-rate environment. Additionally, because they are tied to physical assets, they are often considered a partial hedge against inflation.
In contrast, mortgage REITs (mREITs) do not own physical properties. Instead, they invest in real estate debt, such as mortgages and mortgage-backed securities, earning income from the interest generated by these financial instruments.
Their business model closely resembles that of financial institutions, as they profit from the difference between borrowing and lending rates. Because of this structure, their performance is highly sensitive to fluctuations in interest rates.
Over the long term, equity REITs have generally delivered stronger returns compared to mortgage REITs.
Private vs. Public REITs
The most widely available REITs are those that are publicly traded. These operate similarly to regular stocks, meaning investors can buy and sell shares on stock exchanges through brokerage accounts.
There are over 200 publicly listed REITs in the United States alone. For instance, an investor based in the UK who wants exposure to U.S. REITs—such as Realty Income Corporation or National Retail Properties—would need access to U.S. markets like the New York Stock Exchange through their broker.
On the other hand, private REITs are not listed on public exchanges. This lack of listing means they are significantly less liquid, making it harder for investors to enter or exit positions. Moreover, since they cannot easily raise funds from public markets, their growth potential may be more limited. Historically, these limitations have resulted in private REITs underperforming their publicly traded counterparts.
How does a REIT work?
Want to learn more?
Hope you liked this quick rundown about real estate investment trusts. If you’d like to go deeper, continue by reading one of the articles below:
How to invest in REITs
REIT sectors