The 101 on real estate investment trusts (or REITs)
A REIT, pronounced “reet”, isn’t as intimidating as it sounds. It stands for “real estate investment trust” and more than 87 million Americans actively own shares in various REITs, according to the National Association of Real Estate Investment Trusts.
REITs have been around since the 1960s, and allow people to invest in income-producing real estate (or mortgages) without having to buy, manage or finance the property themselves. They’re a great way to build wealth, diversify one’s assets, and invest in real estate. People can generally invest in REITs by purchasing company stock, through a mutual fund, or through an exchange-traded fund (ETF).
While REITs were originally created with the intention of helping the average person diversify his or her assets, today’s housing market makes this impossible for many Americans. To help broaden access to real estate wealth, Nico created a new type of investment model called a “Neighborhood REIT.” (You can read more about that here.)
But first, we’re breaking down exactly what a REIT is, how it makes money, and how it’s different from owning a mortgage.
What is a real estate investment trust?
It’s a company that owns, operates and finances a group of incoming-producing properties. These groups of properties are referred to as portfolios, and REITs can invest in a wide range of property types like apartment buildings, offices, commercial stores, warehouses, and more.
How do shareholders make money?
REITs make money through rent collected from the tenants that occupy the buildings in that portfolio. When REIT owns a building, leases the space out, and collects the rent, the company (or REIT) generates income.
Real estate investment trusts are considered a safe investment because they must meet very specific qualifications and guidelines. REITs must receive at least 75% of their gross income from real estate-related sources, invest at least 75% of their total assets in real estate, and distribute no less than 90% of their taxable income every year to their shareholders by paying dividends. If a REIT meets all these requirements, the company that owns the reach does not have to pay taxes. Individual investors, however, are required to pay taxes on their dividends or profits.
How are equity REITs and mortgage REITs different?
Equity REITs acquire (and in many cases) manage income-producing real estate properties. This type of real estate investment trust generates income mostly through collecting rents from tenants in the buildings they own. Because of this, Equity REITs mainly invest in residential, hotel, and office building properties. This is also the most common type of REIT and may focus broadly (like nationally) or locally.
Mortgage REITs lend money to real estate buyers or acquiring existing mortgages. Mortgage REITs get their revenue from the interest that they earned on their mortgage loans. These types of REITs typically invest in either the residential or commercial mortgage markets.
Why invest in REITs?
REITs typically have steady performance and low risk and provide a way for people to invest in a specific type of real estate without having to purchase a property directly. The average annual returns for long-term real estate investments vary by sector and by year, but their performance has been strong relative to other asset classes.
Over the last 20 years, Equity REITs (FTSE NAIREIT index) have delivered an average total annual return of 10.66%––compared with 6.19% and 7.77% for the Russell 1000, and Russell 2000 indexes, respectively (Source: NAIREIT analysis of total monthly returns through June 2019).
REITs are a unique real estate asset and can also help diversify your investment portfolio.
Still confused about what a REIT is? No worries, we’ve got you covered! You can reach out via our contact page and we’ll answer your questions.