Real Estate Investment Trusts (REITs)

What Are Real Estate Investment Trusts (REITs)?

Real estate investment trusts, or REITs (pronounced "reetz"), are funds that own, develop and manage income-producing properties in a range of real estate sectors, including shopping malls, offices and commercial buildings, residential apartments and health care facilities. Some of these trusts also invest in mortgages and other property loans.

Basically, REITs collect rent from the tenants of these properties and distribute the income to their investors in the form of dividends. REITs enable investors to own shares in large commercial properties that are otherwise the exclusive domain of large institutional investors. Investors can buy shares in individual REITs, which can be bought and sold like regular common stocks, or in mutual funds and exchange-traded funds (ETFs) that invest in them.

In the U.S., in order to quality as a REIT, these funds must invest at least 75% of their assets in real estate and pay out at least 90% of their taxable income to shareholders, although most pay out close to 100%. While some REITs invest in one property type, some hold multiple types of properties in their portfolios, which provides investors with broad diversification.

Why Invest In REITs?

REITs provide investors with several benefits:

• REITs provide investors with an easy and liquid way to invest in real estate, which is otherwise a fairly illiquid investment. By buying publicly-traded REITs and mutual funds and ETFs that invest in them, investors can buy and sell shares quickly.
• REITs often offer higher yields than some other investments, such as bonds and dividend stocks.
• Historically, REITs and real estate assets don't correlate with the performance of stocks and bonds, which reduces portfolio risk and increases returns.^[1]
• By owning many properties, REITs by definition are diversified investments. A mutual fund or ETF that invests in REITs provides a further layer of diversification.

Disadvantages Of REITs

While REITs generate a steady income stream for investors, they usually offer less in the way of capital appreciation compared to other investments.

Also, real estate markets tend to be cyclical and dependent on the overall economic environment and the level of interest rates. However, REITs' diversification among many types of properties can smooth out the ups and downs of the market.

REIT Sectors

While most REITs focus on a particular property type, many hold multiple types of properties in their portfolios. Here are some of the most common types of REITs:

• Office REITs own and manage office buildings, ranging from skyscrapers in urban centers to office parks in suburban areas.
• Industrial REITs own and manage everything from warehouses to distribution centers. As a result, industrial REITs play an important and growing role in e-commerce.
• Retail REITs include large shopping malls, outlet centers, strip malls and other similar properties.
• Lodging REITs own hotels, motels and resorts.
• Residential REITs include apartment buildings, student housing, manufactured homes and single-family homes.
• Health care REITs own senior living facilities, hospitals, nursing homes and medical buildings.
• Infrastructure REITs include such things as wireless towers and energy pipelines.
• Specialty REITs own a variety of properties that don't fit in other categories, such as movie theaters, casinos, farmland and outdoor advertising sites.

Summary

Real estate investment trusts, or REITs, are funds that own, develop and manage income-producing properties in a variety of real estate sectors. REITs collect rent from the tenants of these properties and distribute the income to their investors in the form of dividends.

REITs tend to pay higher dividends than other types of equity investments as well as bonds. Investors can buy shares in individual REITs that can be bought and sold like regular common stocks, or in mutual funds and ETFs that invest in them.