Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) provide investors with a unique opportunity to invest in large, professionally-managed real property, which would likely be unaffordable otherwise. REITs are corporations that own and manage real estate and/or mortgages. Because REITs are corporations, investors acquire shares instead of purchasing real estate directly. So long as REITs distribute 90% of their income annually, they do not pay corporate income taxes. REITs are generally designed to provide income, which is received as ordinary dividends by their shareholders. Also because of their corporate structure, minimum investment requirements are usually less than $5,000.
REITs come in all different shapes and sizes. Equity REITs are corporations that invest in and manage real property, such as commercial office buildings, retail centers, multi-family homes, hotels, senior housing, and self-storage facilities. Equity REITs earn their income and growth both from rents and through property appreciation. Mortgage REITs, on the other hand, lend money by investing in mortgages or mortgage-backed securities. Mortgage REITs earn income from interest. Some REITs invest in both real property and mortgages and are known as Hybrid REITs.
There are over 200 REITs registered with the Securities and Exchange Commission (SEC). Of these, most are publicly traded, meaning that investors can purchase and sell shares on exchanges such as the New York Stock Exchange (NYSE). There are some, however, that are not publicly traded and can only be purchased directly from the REIT itself. Non-publicly traded REITs are not subject to market fluctuation. Because these REITs do not trade publicly, their share price is not determined by supply and demand. Instead, its value is calculated based on the underlying properties. Investors should be aware that non-publicly traded REITs do not offer as much liquidity as their publicly-traded counterparts. Since liquidity options vary among REIT programs, it is important to discuss them with your financial advisor before you invest.
REITs should not be confused with Tenant In Common investments (TICs). TICs are a form of direct real estate ownership, which carries certain additional benefits, such as the ability to perform a tax-deferred 1031 exchange. Like REITs, TICs also allow investors to pool their money together in order to purchase property that may be unaffordable otherwise. However, TICs often invest in only one property, whereas REITs are usually diversified among multiple properties. Additionally, securitized TICs are limited to 35 accredited investors, whereas the number of REIT shareholders is generally unlimited.