1: What is a REIT?
The acronym REIT (rhymes with sweet) stands for Real Estate Investment Trust. A REIT is a company, trust or other entity which earns its income chiefly by managing real estate or real estate mortgages, or both. Equity REITs own and operate real estate. Mortgage REITs own the mortgages on real property. Hybrid REITs both own property and mortgages on real property.
REITs do not pay corporate taxes, but as a result:
*They must pay out at least 95% of their taxable income to their shareholders as dividends;
*They must have at least 75% of investment assets in real estate;
*They must earn at least 75% of gross income from real estate (either through rents or mortgage interest); and
*They must not earn more than 30% of gross income from sales of real estate held less than four years.
(There are also restrictions on REITs concerning stock ownership and corporate structure. The above restrictions are the most pertinent to an investor.)
2: How do I invest in a REIT?
Publicly held REITs can be invested in by purchasing shares, just as you would purchase shares in any public corporation, and are traded on stock exchanges.
3: Why would I want to invest in a REIT?
A REIT allows you to invest in real estate without being Donald Trump. Many shares in REITs are in the $20-$40 per share range, allowing individual investors of even modest means to participate in the real estate investment market. Also, if you change your mind about owning shares in a REIT, you can sell them on the stock exchange, rather than go through the inconvenience of hiring a broker, marketing property and negotiating a sale. (This is a quality known as “liquidity”.) Because REITs distribute dividends, you may also wish to invest in a REIT if you would like an investment that pays some amount of income back to you.
4: Are there any “basics” to keep in mind?
There are three key points to keep in mind if you would like to invest in REITs.
First, don’t rely just on this article to make a decision. As with any other investment, do your research. Many of the 300 or so publicly traded REITs have web sites with investor information.
Second, go for what you know. Some REITs specialize in apartments; others will own and operate only office buildings. Still others specialize in retail, hotels, medical facilities or other particular types of buildings. Some REITs will also specialize by geography, and invest only in Eastern U.S. property, Midwest property, etc. Find out what a REIT specializes in, and match that to your background and interests as much as possible.
Third, carefully look at a REIT’s diversification. If they specialize only in apartments, are they diverse enough geographically or otherwise to withstand a huge downturn in renters due to cheaper home prices? If a REIT only invests in the Northeast, what happens if that part of the economy becomes sluggish? Specialization will give a REIT the expertise it needs to efficiently run operations, but if it doesn’t have a “Plan B” to keep it afloat, it may be too vulnerable to make it a worthy investment.
5: Where can I go for more information about REITs?
There are many sources on the web to get more information. Most financial web sites have a REIT component (either on its own or as a sub-set of real estate investment in general). Some good starting points for getting more information include:
This site’s free information gives some basic REIT information. I tried their glossary (also free), but it had nothing for either “equity REIT” or “net income”.
This is the site of the National Association of Real Estate Investment Trusts, the industry group for REITs. Their section about REIT history and regulations is excellent.
This is Hoover’s online listing of various REITs, divided by specialization. A good starting point to see what REITs are in what specialty.
SNL Securities’ list of REIT web links. A good starting point for searching for REIT information online.