REIT stands for Real Estate Investment Trust. A REIT is a company that owns and usually manages income-producing real estate property such as apartments, offices and industrial space. Along with meeting additional criteria, to qualify as a REIT the company must:
Congress established REITs in 1960 to provide small investors with the opportunity to invest in large, income-producing properties. The stocks of most REITs are freely available on major stock exchanges. They present investors with an efficient method of investing in real estate; each shareholder earns a pro rata percent of the REIT's profits.
Perhaps one of the most attractive aspects of REITs is the methods in which taxes are handled. REITs are allowed to deduct dividends paid to shareholders from their taxable corporate income which can frequently remove all tax burdons. Taxes are only paid by the individual investor for the dividends received and any capital gains.
There are currently about 180 REITs that control a total of over 300 billion dollars. Many REITs focus on one particular type of property such as residential or commercial. Some handle the maintenance and management of the properties within their portfolios whereas others use contractors to perform this work.
There are three types of REITs; equity, mortgage and hybrid - as defined below.
An Equity REIT (real estate investment trust) is a corporation that purchases, owns and manages real estate properties; it does not own or originate real estate loans. It may also develop properties. (For more information and listings of publicly traded equity REITs by property type groups, please see RealtyStock's Equity REITs).
A Mortgage REIT (real estate investment trust) is a corporation that purchases, owns and manages real estate loans; it does not own real estate properties. It may or may not originate commercial and/or residential loans. (For more information and listings of publicly traded mortgage REITs, please see RealtyStock's Mortgage REITs).
A Hybrid REIT (real estate investment trust) is a corporation that purchases, owns and manages both real estate loans and real estate properties. It has the qualities of both an equity and mortgage REIT which is why it is referred to as a hybrid. (For more information and listings of publicly traded hybrid REITs, please see RealtyStock's Hybrid REITs).
It is important to be aware of the essential difference between a REIT and a real estate mutual fund or limited partnership. Real estate mutual funds are 'open-ended. This means that the client/customer can require them to redeem the value of the shares at any time. That means that whether or not the fund has the money on hand or not, if redemption is requested the fund has to comply. The result of this is that when markets cool, investors want out, and the fund finds itself carrying a heavy redemption load.
Where do they get the money? They sell some property into an often already depressed market which, of course, pushes the market even lower. The end result is a sort of dreadful snowball. The fund sells to meet obligations, the resulting drop panics some more investors, they come running to the fund waving their rapidly devaluing paper --- no fun for anyone
REITs on the other hand are not open ended. They are 'closed-ended: X number of units are issued and traded on the stock exchange. Sure, they rise and fall depending on what's happening in the marketplace with the value of the properties in the trust but the REIT has no obligation to redeem the units. Just like any other stock market investment the REIT holder sells it in the market for whatever it will bring and that's that. If it's doing well and therefore beloved then it will rise in value. If it's not doing well then the opposite will occur --- just like real life.