Real Estate Investment Trust (REIT)

What is a Real Estate Investment Trust (REIT)?

The basic real estate investment trust (REIT) definition is a company that owns or finances income-producing property-related investments.

These businesses will have to meet various criteria to qualify for REIT status, and many are found trading on major global stock exchanges.

Here, we define a REIT, examine the types of REITs available, and explain why they should be considered by anyone looking to invest in real estate. We will cover every question an investor needs to ask, from what REIT stands for to what are REIT rules that must be understood.

Table of Contents Table of Contents

1. What is a Real Estate Investment Trust (REIT)?
2. Key Takeaways
3. How a REIT Works
4. How Do REITs Make Money?
5. Types of REITs
6. How to Invest in REITs
7. REIT Assessing
8. REIT Pros and Cons
9. The Bottom Line
10. FAQs
11. References

Show Full Guide

Table of Contents

1. What is a Real Estate Investment Trust (REIT)?
2. Key Takeaways
3. How a REIT Works
Show Full Guide
4. How Do REITs Make Money?
5. Types of REITs
6. How to Invest in REITs
7. REIT Assessing
8. REIT Pros and Cons
9. The Bottom Line
10. FAQs
11. References

How a REIT Works

Let’s start by taking a look at how REITs work. Basically, they are companies that mostly trade on global stock exchanges in the same way as other stocks.

However, their REIT structure means they can own and operate income-producing real estate in various sectors with the aim of making money. These assets can give individual investors exposure to properties such as hotels, warehouses, office blocks, apartments, and shopping malls.

Unlike other real estate companies, REIT companies don’t develop properties to sell them, according to the U.S. Securities and Exchange Commission (SEC).

“Instead, a REIT buys and develops properties primarily to operate them as part of its own investment portfolio,” it stated.

This has made them a popular choice for anyone interested in real estate investing since they were first established by the US Congress in 1960.

How Do REITs Make Money?

Now we have looked at what is a real estate investment trust, it’s time to examine their investment potential and whether their approach can be easily understood.

The good news is that most REITs operate straightforward business models, according to the National Association of Real Estate Investment Trusts (Nareit) in the US.

“By leasing space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends,” it stated.

Nareit also pointed out that REITs must pay at least 90% of their taxable income to shareholders, and most payout 100%, while shareholders pay the income taxes on REIT dividends.

At this point, it’s worth answering the question: “What are REIT dividends?” They are payments made to shareholders by the management of the REIT in question.

In addition, Nareit highlighted that REITs are professionally managed, publicly traded companies that have generated decent returns in the past.

It noted:

Of course, it’s crucial to point out at this stage that past performance is certainly no guarantee of future returns. Would-be investors must never commit more than they can afford to lose.

Types of REITs

Of course, anyone looking at what REITs are and how they work will need to know that there are several different types.

Here, we cover publicly traded REITs and private REITs, as well as some other property investing terms with which you should be familiar.

How to Invest in REITs

So, now we look at how to invest in REITs. The good news is that it’s not a complicated process.

As they are listed on major stock exchanges around the world, investors can purchase shares in them, just as they would any other company.

However, if you’re unsure of how they work or the potential risks involved, it’s worth seeking the advice of a financial advisor who can provide some guidance.

Of course, REITs aren’t the only property-related investments. Here we have taken a look at some of the best real estate stocks to buy in 2024.

REIT Assessing

Analysts use different metrics to value potential holdings in their portfolio. However, a few are particularly favored when it comes to REITs.

One of the most common is Funds from Operations (FFO). This illustrates the amount of cash flow that is actually generated from the company’s business operations.

The calculation involves adding the non-cash expenses or losses (such as depreciation) and any losses on the sale of assets to net income, according to the Corporate Finance Institute.

The next stage is to subtract any gains on the sale of assets and interest income.

REIT Pros and Cons

Here are some broad pros and cons to factor in when you’re considering whether an investment in a REIT will meet your needs.

The Bottom Line

The clearest REIT definition is a company that owns or finances income-producing real estate investments. In most cases, these REITs are traded on major stock exchanges.

However, the question is: “Should you consider buying the shares of a REIT?” The answer, unfortunately, is not straightforward. It all depends on your investment goals and attitude to risk, as well as your views on the outlook for property and what investments you already hold.

There are also plenty of REITs in which you can invest, so you’ll need to examine their portfolio of assets to see if they include areas to which you want exposure.

Although REITs have provided decent returns in the past, as well as acting as a useful diversifier in portfolios, there’s no guarantee that they will make you money.

As always, you will need to carry out your own analysis before committing your money and possibly seek the help of a qualified financial advisor.

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