In this article, we will explain what REIT means, different types of REITs, and how to buy REITs. If presented in examples, specific REITs that are mentioned are not to be taken as a recommendation or advice from a licensed financial or securities professional. Information in this article is purely for information and educational purposes. Now that housekeeping is done, let’s learn more about real estate investment trusts.
What does REIT mean?
According to Charles Schwab, “A Real Estate Investment Trust (REIT) is a security that trades like a stock on the major exchanges and owns—and in most cases operates—income-producing real estate or related assets.” They can either be publicly traded and registered with the SEC, or registered with the SEC and not publicly traded. REITs are organized as corporations and must receive the majority of their income from real estate activities including rents, property management fees, interest from mortgages, and mortgage-backed securities.
Many REITs will focus on a specific sector of properties like retail or shopping centers, hotels and resorts, or healthcare and hospitals. The graph below from Fidelity.com shows the performance of REIT sectors in 2021.
Many investors like REITs because they are required to pay 90% of their taxable income to shareholders as dividends.
Types of real estate investment trusts
If you want to diversify your portfolio, the good news is that there are different types of REITs to choose from. Some of the more common types with explanations are below.
Equity REIT
Equity REITs are the most common type of REIT. They acquire, own, manage, construct, renovate, and sell properties. Income is generated through rents collected from tenants.
Commercial REIT
Commercial REITs are sometimes subcategorized as retail or office REITs. These REITs own and operate commercial properties such as shopping centers, office buildings, data centers, storage facilities and many other commercial locations. Commercial REITs are a type of Equity REIT.
Residential REIT
Residential REITs are Equity REITs that own and operate residential housing properties. These properties can include multi-family properties, single-family homes, apartment complexes, and even mobile homes.
Healthcare REIT
Healthcare REITs invest in the real estate of hospitals, medical centers, nursing homes, and retirement homes. Instead of income from rents collected by tenants, most Healthcare REIT operators get income from occupancy fees, Medicaid/Medicare reimbursements, and private pay.
Mortgage REIT
Mortgage REITs invest in mortgages, mortgage-backed securities, and related assets. Instead of rents, occupancy fees, or property management fees, Mortgage REITs generate income from the interest on the mortgages that are owned.
So, how do you buy REITs?
There are a couple of different ways you can invest in a REIT. Options include investing in individual funds traded on a stock exchange, or mutual funds that track broad or specialized REIT indexes. Companies such as Charles Schwab, E*TRADE, Fidelity, Vanguard, and many others can be contacted, or offer on-line account setups.
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