What are Real Estate Investment Trusts (REITs)?

Real estate investment trusts or REITs are essentially companies that own, finance or manage income-generating properties. They invest in a wide range of real estate types—from apartment buildings to medical facilities, retail, offices, warehouses, all the way to infrastructures such as cell towers, fiber cables, and energy pipelines.If you are familiar with how mutual funds work, you already have a good understanding of how to invest in REITs.

What is REIT?

Like mutual funds, a REIT pools the capital of many investors into a basket and invests them in income-producing properties. This lets individual investors make money in the form of dividends from the REIT's property investments without having to purchase, operate, or finance any real estate properties themselves.REITs can generate a solid and steady income stream for people who invest in them, but they don't offer much capital appreciation. Still, they are trendy with investors who want to invest in the property market while staying liquid. That's because most REITs can be traded like stocks and are therefore easier to sell than physical properties. Recent estimates say that REITs collectively own around $3 trillion in assets, with publicly traded equity REITs accounting for about $2 trillion.

Pros and Cons at Glance

Pros

Diversification

• Liquidity
• Transparency
• Attractive risk-adjusted returns
• Stable cash flow via dividends

Cons

• Dividends are taxable as regular income
• Potentially high transaction and management fees
• Low growth
• Subject to market risk

Types of REITs

• Mortgage REIT- Holds mortgages on real estate properties. They lend money to property operators and owners either directly (through loans and mortgages) or indirectly (by acquiring mortgage-backed securities).
• Equity REIT - Owns and operates income-producing properties. Revenues are mainly generated through rent instead of by reselling properties.
• Hybrid REIT – Does both. These REITs hold mortgages and own properties.

REITs are also further categorized based on how their shares are purchased and held:

• Private REITs – Not SEC-registered and do not trade on national securities exchanges. It can be bought only by and sold only to institutional investors.
• Publicly Traded REITs - Regulated by the SEC and listed on a national securities exchange where individual investors can buy and sell their shares.
• Public Non-Traded REITs – Registered with and regulated by the SEC but are not traded on national securities exchanges. Because of this, they are considered to be less liquid compared to publicly-traded REITs. However, some investors prefer them because they tend to be stable against market fluctuations.

How do you start investing in REITs?

You can quickly put money in publicly traded REITs, REIT exchange-traded funds, and REIT mutual funds by buying shares through a broker.If you're interested in buying non-traded REIT shares, you have to talk to financial advisors or brokers participating in the offer. It's always prudent to do some background checks on the investment advisor or broker recommending the REIT. Luckily, the SEC provides a free search tool where you can check if an investment professional is registered and licensed.