- A REIT or real estate investment trust is a type of company that owns and often operates income-producing real estate.
- Real estate investment trusts are similar to mutual funds; both pool together various investments in one place.
- REITs can be classified in a few different ways: by sector, by how they generate income, and by whether or not they are publicly traded.
- Since a REIT is representative of many different investments, investing in a REIT can be attractive for risk-averse investors who are interested in diversifying their investment portfolio.
What are REITs?
A REIT or real estate investment trust is a type of company that owns and often operates income-producing real estate. Some REITs invest in a wide array of real estate properties, such as offices, warehouses, and retail, while others remain specialized and manage only one type of property. Many REITs are publicly traded, and therefore offer anyone the opportunity to invest in portfolios of real estate assets.
How do REITs work?
Real estate investment trusts are similar to mutual funds; both pool together various investments in one place. Therefore if an investor owns one share of a REIT, she owns a piece of all the real estate assets held by that particular REIT. While mutual funds and REITs are similar in the way they function, certain requirements differentiate REITs from other investment opportunities. To qualify as a REIT there are many things a company must do. Most notably, 75% of gross income must be real-estate related and 90% of this gross income must be distributed to investors. That being said, not all REITs are the same and a prospective investor needs to understand the various types of REITs that exist.
Types of REITs
REITs are often classified by what sector or industry they specialize in within the real estate environment. For example, healthcare REITs own or operate hospitals, nursing homes, and medical centers while retail REITs own or operate shopping centers, malls, and stand-alone retail shops. Other popular industry-specific REITs include residential REITs and office REITs.
REITs can also be classified by how they generate income. Most real estate investment trusts are classified as either equity REITs or mortgage REITs. Equity REITs derive income by owning or operating income-producing real estate. Mortgage REITs (mREITs) derive income by collecting interest on their investments in mortgages and mortgage-backed securities. Equity REITs are more common than mortgage REITs, so it is often assumed that a REIT is an equity REIT unless clarified.
While investors often refer to publicly traded real estate investment trusts, it is important to note that there are privately owned real estate investment trusts as well. Any REIT that is publicly traded presents investors with an opportunity to buy shares.
How to Invest in REITs
As mentioned, publicly-traded REITs allow investors to invest in the real estate industry without taking on the risk of investing in their own properties. Since a single REIT is representative of many different real estate investments, investing in a REIT is considered a great, relatively low-risk, way to diversify an investment portfolio. Despite its reputation for being low-risk, it is important to take a critical look at different types of REITs and their historical success. Like any other investment, the success of industry-specific REITs is dependent on many external economic influences.
Here are some REIT stocks that are available to investors:
- Brookfield Property REIT Inc. (BPYU)
- Omega Healthcare Investors (OHI)
- Cedar Realty Trust (CDR)
- Kimco Realty Corp (KIM)
- Brandywine Realty Trust (BDN)
- Americold Realty (COLD)
As mentioned, REITs are a great way for people to invest in real estate without taking on the traditional risks associated with owning or operating property. Some people prefer to invest in real estate investment trusts that are focused on a specific industry such as healthcare, retail, or residential properties. Like other investments, one industry-specific REIT may perform better than others due to various economic influences. Given that REITs invest in many different properties to generate income, they are considered lower-risk than other investments. Similar to mutual funds, REITs are considered to be a good way to diversify an investment portfolio. If you are interested in the real estate industry and are looking for a relatively low-risk way to diversity your investment portfolio, it may be worth looking into different real estate investment trust stocks.