Real Estate Investment Trust (REIT): what they are and why investors use them

Answer

Intro: A real estate investment trust (REIT) is a company that owns, operates or finances income-producing real estate and distributes most of its taxable income to shareholders as dividends. REITs let individual investors access commercial real estate cash flow — office buildings, shopping centers, apartments, industrial parks, and mortgages — without buying physical property.

Main points — structure and types: Public REITs trade on stock exchanges and offer liquidity similar to stocks. Private and non-traded REITs exist too, but they typically limit liquidity and often target accredited investors. REITs fall into three broad categories: equity REITs (own and manage properties), mortgage REITs (mREITs) (hold or finance property debt) and hybrid REITs (combine both strategies). Sector-focused REITs concentrate on niches — residential, industrial, healthcare, data centers, retail — each with unique risk/return characteristics.

Key tax and regulatory features: To qualify for REIT tax status under U.S. tax law, a company generally must distribute at least 90% of its taxable income to shareholders, meet income- and asset-tests that prioritize real-estate income and assets, and satisfy ownership rules designed to keep shares broadly held. Because REITs typically avoid corporate-level tax if they meet these rules, they frequently pay higher dividend yields than many common stocks, but shareholders also face ordinary-income tax treatment on most dividends.

Benefits and risks: REITs provide regular income, professional property management, portfolio diversification, and public-market liquidity (for listed REITs). Risks include sensitivity to interest rates, leverage, local real-estate cycles, tenant credit risk, and sector concentration. Mortgage REITs, in particular, carry interest-rate and credit spread risk; equity REIT values follow property fundamentals and rent trends.

How to invest: You can buy shares of publicly traded REITs through a brokerage account, invest via REIT-focused mutual funds or ETFs, or consider private REITs for longer-term exposure (note liquidity and accreditation limits). Before investing, examine a REIT’s portfolio composition, leverage, payout history, funds from operations (FFO) or similar performance metrics, management track record, and fee structure.

Final note: REITs suit investors seeking income and real-estate exposure without direct property ownership, but they differ materially from owning a rental property. Evaluate tax implications, liquidity needs and risk tolerance, and it’s advisable to consult a licensed attorney, tax advisor, or financial professional for decisions tailored to your situation.