This page of our free SIE Study Guide provides an overview of real estate investment trusts, more commonly referred to as REITS.
REITs are companies that pool money from investors and then invest in income-producing real estate and other real estate assets such as apartments, resorts, office buildings, mortgages, and more. By investing in REITs, individuals can participate in commercial real estate earnings without actually needing to buy or own any properties.
REITs operate similarly to other packaged portfolio products although they are generally comprised of real estate and real estate related investments rather than securities. Like DPPs, they are subject to a pass-through taxation model.
Types of REITS
Publicly Traded REITs: Publicly traded REITs are registered with the SEC and are generally more liquid than the other types. Like stocks and ETFs, they trade on a national securities exchange and can be purchased through brokerage accounts.
Public Non-listed REITs: Public non-listed REITs are available to all investors and are registered with the SEC, but they do not trade on a stock exchange and are considered to be generally illiquid. Investors can purchase such REITs through brokers that participate in that type of offering.
Private REITs: Private REITs are generally exempt from SEC registration and are purchased through private placement offerings rather than being traded on a stock exchange. They are therefore subject to fewer disclosure requirements, making them more difficult to value, and carry additional risks as compared to the other types.
FINRA suggests that REITs should only be sold to investors who understand the volatility of the real estate market and the fact that they are exposed to substantial losses in their invested principal. Private REITs, specifically, are generally only sold to accredited investors.
Equity vs. Mortgage (Debt) REITs
REITs typically invest in properties, mortgage loans, or both.
Equity REITs: These make up the majority of the REIT market. They acquire and manage commercial real estate properties, such as hotels or apartment complexes, and generate revenue by collecting rent from the tenants and businesses that lease the properties. Once the costs of operating these properties are met, equity REITs must pay out at least 90 percent of their income to shareholders via dividends, typically on a monthly or quarterly basis.
- Equity REITs can make additional income through the price appreciation of their real estate properties.
Mortgage REITs: Also referred to as debt REITs, these make up less than 10 percent of the REIT market. They lend money to real estate buyers and then generate revenue by collecting interest on the debt instruments (mortgage loans, mezzanine loans, etc.). They are also required to pay out at least 90 percent of their annual taxable income to shareholders like equity REITs.
- Unlike equity REITs, mortgage REITs are unable to benefit from property price appreciation as they do not actually own any physical real estate.