REIT Fundamentals

Get information on Real Estate Investment Trust Fundamentals and learn about the types of REITs

REIT Fundamentals

A real estate investment trust, or REIT, is a company that pools the money of many investors to purchase and, in most cases, operate income-producing real estate.

The stockholders of a REIT are purchasing equity in the REIT and, in turn, earning a pro-rata share of the potential economic benefits that can be derived through commercial real estate ownership.

REIT investors get many of the potential advantages of property ownership, but leave the hassles of identifying, acquiring and managing those assets to the REIT sponsor.

For investors, including a REIT allocation in their portfolio may offer key advantages such as:*

  • Capital preservation
  • Attractive risk-adjusted returns
  • Stable cash flows
  • Professional management
  • Diversification
  • Potential inflation hedge

*REIT investments do not guarantee a profit or ensure against a loss.

Types of REITs

To qualify as a REIT, a company must comply with a number of requirements, including having most of its assets and income tied to real estate investments and distributing at least 90 percent of its taxable income to shareholders annually in the form of distributions.

Traded vs Non-Traded REITs: A Comparison

  Traded REITs Non-Traded REITs
Holding Period Flexible. As long or short as investor chooses A long-term investment. Typically a multiyear
holding period
Share Price Variable, based on trading on an exchange Stated share price, which generally does not fluctuate during the initial offering period
Liquidity Highly liquid Very limited. Restricted redemption programs may be made available by REIT sponsor
Volatility Exposed to stock market fluctuations Insulated from stock market fluctuations

Equity REIT

Equity REITs are the most common type of REIT and purchase, own and manage income-producing real estate properties. Equity REITs may be beneficial for long-term investors because, in addition to potentially earning dividends from rental income, investors also receive any capital gains from the sale of properties.

Mortgage REIT

Mortgage REITs lend money directly to real estate owners and their operators, or indirectly through acquisition of loans or mortgage-backed securities. They do not invest in properties, but generate revenue through the interest paid on their mortgage loans.

Hybrid REIT

Hybrid REITs are a combination of equity and mortgage REITs.

A further REIT classification is based on how shares of the REIT can be purchased and held. REITs can either be publicly traded, public non-traded or private.

Publicly Traded REITs

Traded REITs have shares listed on a national securities exchange (such as the New York Stock Exchange [NYSE]).They are registered with and regulated by the U.S. Securities and Exchange Commission (SEC) and required to file certain reports with the SEC pursuant to federal securities laws, including quarterly and annual reports. Traded REITs are more liquid than non-traded REITs; however, they are subject to the same market fluctuations and volatility as other exchange-traded stocks.

Public Non-Traded REITs

Non-traded REITs are also registered with and regulated by the SEC and required to file certain reports with the SEC pursuant to federal securities laws, including quarterly and annual reports. However, non-traded REITs are not listed on any public securities exchange, making them less liquid than their traded REIT counterparts. Non-traded REITs are generally considered more stable and less volatile than traded REITs because they are not subject to the same stock market fluctuations as traded REITs. However, non-traded REIT investors generally do not have the ability to realize any gain on the sale of their shares until the REIT completes its cycle of fundraising, operation and liquidation. Moreover, the price per share received by an investor upon liquidation may not necessarily reflect the value of the company. Investors must meet minimum eligibility requirements to invest in non-traded REITs.

Private REITs

Private REITs are not registered with the SEC or traded on a securities exchange and are subject to less regulation, with the exception of guidelines associated with qualifying and maintaining REIT status.