What Is A REIT? (2024)

Different types of REITs operate in different ways. Below is a closer look at some of the most common types of REITs to understand.

Mortgage REITs

Mortgage REITs (mREITs) derive their income from interest on mortgages. Each type of property is built with the proceeds of a mortgage, and some REIT investors collect the interest paid on the mortgage as income. They’re popular because they return the relatively high interest payments collected on commercial mortgages.

Commercial real estate mortgages come at a higher interest rate because they’re considered riskier than those underlying residential real estate. Thus, investors in commercial mortgage REITs will earn more interest (while assuming more risk) than those investing in residential real estate mortgage REITs.

Equity REITs

Properties can generate rental income, which, after collecting fees for property management, provides income to its investors. These REITs generate income from renting real estate to tenants. After paying expenses for operation, equity REITs pay out dividends to their shareholders on a yearly basis.

Hybrid REITs

Hybrid REITs contain both equity and mortgage holdings. They give investors more diversity, offering better protection from real estate market swings. They can work well with both income- and growth-oriented portfolios.

Publicly Traded REITs

Due to the accessible nature of publicly traded REITs, this is the way most people invest in real estate.

Publicly traded REITs trade on a stock exchange, such as the Nasdaq or the New York Stock Exchange (NYSE). They’re highly liquid – meaning they can be bought or sold at any time, so your money isn’t tied up – and are open to all types of investors. You can open a brokerage account with any online trading platform and begin purchasing REITs.

Publicly Non-Listed REITs

Publicly non-listed REITs are offered to all but not listed on stock exchanges. There are both legitimate reasons for this – as when a project requires a low profile for competitive reasons – and unscrupulous ones as well. These projects typically offer little transparency and often charge upfront fees, so you need to know who you’re dealing with and have a keen understanding of the project and its risk.

The potential upside is a bigger return that reflects the greater risk you’re incurring. However, there are significant potential downsides as well for novice investors. In addition to the risk of fraud, buying into a public non-listed REIT means you are forsaking the consumer protections and avenues of redress afforded by SEC regulations.

Private REITs

Private REITs are not open to the public. They aren’t registered on the SEC and are only sold to institutional investors or accredited investors. These REITS usually have high minimum investments and are considered illiquid investments, as they can be very hard to sell.

What Is A REIT? (2024)


What is REIT and how it works? ›

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool capital investors who earn dividends from real estate investments. Investors do not individually buy, manage, or finance any properties.

Is a REIT a good investment? ›

Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.

What is a disadvantage of a REIT? ›

Key Takeaways

One risk of non-traded REITs (those that aren't publicly traded on an exchange) is that it can be difficult for investors to research them. Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them.

Can I invest $1000 in a REIT? ›

While they aren't listed on stock exchanges, non-traded REITs are required to register with the SEC and are subject to more oversight than private REITs. According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.

Can I get my money out of a REIT? ›

While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.

How do REIT owners make money? ›

REITs make their money through the mortgages underlying real estate development or on rental incomes once the property is developed. REITs provide shareholders with a steady income and, if held long-term, growth that reflects the appreciation of the property it owns.

Do REITs pay monthly? ›

For investors seeking a steady stream of monthly income, real estate investment trusts (REITs) that pay dividends on a monthly basis emerge as a compelling financial strategy. In this article, we unravel two REITs that pay monthly dividends and have yields up to 8%.

Does Warren Buffett invest in REITs? ›

He and Charlie Munger, vice-chairman of Berkshire Hathaway, actively dismissed it for many years. However, Buffett has recently invested in REITs as part of his passive income strategy. Berkshire Hathaway Inc.

What I wish I knew before buying REITs? ›

REITs must prioritize short-term income for investors

“They pay out stable dividends, provided the properties are doing well,“ says Stivers, the financial advisor from Florida. In exchange for more ongoing income, REITs have less to invest for future returns than a growth mutual fund or stock.

Are REITs safe during a recession? ›

By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions. Typically, the upfront costs of investing in a REIT are low, while their risk-adjusted returns tend to be high.

What happens to REITs when interest rates go down? ›

With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts. However, REIT stocks are only as good as the properties they own — and some real estate sectors may be better positioned than others.

Are REITs bad for taxes? ›

It's not necessarily a bad idea to own REITs in taxable brokerage accounts. But because of complex REIT taxation rules, they certainly make more sense in IRAs. This way, the REITs avoid taxation on the corporate level and you can defer or avoid taxes on the individual level, as well.

Can I sell my REIT anytime? ›

Investors can buy and sell shares of public REITs at any time during trading hours. With private REITs, on the other hand, investors may have to wait for a redemption event, which can occur quarterly or annually, before they can cash out their investment. Additionally, private REITs may charge redemption fees.

What is the 90% REIT rule? ›

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

What's the average return on a REIT? ›

Which REIT subgroups have done the best at outperforming stocks?
Health Care11.6%
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Mar 4, 2024

What are the pros and cons of a REIT? ›

Benefits of investing in REITs include tax advantages, tangibility of assets, and relative liquidity compared to owning physical properties. Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.

Is a REIT better than owning property? ›

Perhaps the biggest advantage of buying REIT shares rather than rental properties is simplicity. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Diversification is another benefit.

What is the average return of a REIT? ›

REITs in the United States saw an annual total return of 11.4 percent in 2023, according to the FTSE Nareit All Equity REITs index. Nevertheless, in 2022, the index had a negative total return of 25 percent. Performance improved for all property types, except for diversified, free standing retail, and infrastructure.

Why REIT is better than owning property? ›

Because the REIT manages the property, investors are not burdened with the everyday stress of vacancies, tenants, management or repairs. REITs also pay out dividends to investors, providing a reliable passive income stream.

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