Definition
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate like malls, office buildings, and apartments. Investors can buy shares in a REIT which provides them with a way to earn dividends from real estate investments without having to buy, manage, or finance any property themselves. Essentially, REITs are to real estate as mutual funds are to the stock market.
Key Takeaways
- A Real Estate Investment Trust (REIT) is a company that owns, and in most cases, operates income-producing real estate. Types of real estate assets managed by REITs might include apartment buildings, hotels, office buildings, or shopping centers.
- REITs provide an investment structure similar to mutual funds and offer their own shares to individual investors. By buying shares in a REIT, an investor can access real estate investments without having to purchase or finance property independently.
- By law, REITs are required to pay out at least 90% of their taxable income to shareholders in the form of dividends. This requirement makes REITs attractive to income-focused investors, as they often offer higher dividend yields than other types of stocks.
Importance
The finance term Real Estate Investment Trust (REIT) is important because it provides an avenue for individual investors to earn a share of the income produced through commercial real estate ownership—without actually having to go out and buy commercial real estate.
Given that the acquisition and management of commercial properties are often associated with significant expenses and complexities, REITs make it possible for a larger group of people to benefit from real estate investment.
This kind of security also offers investors the advantages of long-term, consistent income streams, diversification of portfolio, and potentially higher returns compared to other investment options.
In essence, REITs democratize the process of investing in real estate by lowering the barriers to entry.
Explanation
The principal purpose of a Real Estate Investment Trust (REIT) is to offer individuals the opportunity to invest in large-scale, income-generating real estate. It’s a way for investors to own and profit from real estate properties, such as condominiums, shopping malls, office buildings, and apartments, without having to directly purchase or manage the properties, making them especially appealing for individuals who want to add real estate to their portfolios but do not have the necessary capital, time, or expertise to purchase properties outright.
REITs are used to pool the capital of numerous investors, allowing them to participate in owning and profiting from real estate investments that might be otherwise out of reach. Because they pay out a significant portion of their taxable income (90%) in the form of dividends to their shareholders, REITs are a coveted choice for income-focused investors.
They also offer diversification, as they can be sector-specific, thereby granting the investor exposure to different industries in the real estate market. Overall, REITs democratize the access to real estate investing, providing both small and large investors the opportunity to capitalize on real estate ownership.
Examples of Real Estate Investment Trust (REIT)
Simon Property Group, Inc.: Simon Property Group is a global leader in retail real estate ownership, management and development, and is one of the largest REITs in the United States. They own or have an interest in more than 200 retail real estate properties in the United States and Asia.
Equity Residential: A large REIT that owns and manages multi-family residential properties throughout the United States. As of 2020, the REIT’s portfolio included more than 300 properties located in urban and high-density suburban areas.
Brookfield Asset Management: One of the world’s largest real estate and infrastructure asset managers, Brookfield operates numerous REITs that specialize in sectors such as commercial real estate, renewable energy and infrastructure. The company manages more than $575 billion in assets around the globe.
Frequently Asked Questions: Real Estate Investment Trust (REIT)
What is a Real Estate Investment Trust (REIT)?
A Real Estate Investment Trust, or REIT, is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification, and long-term capital appreciation.
How does a REIT work?
REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through the purchase of individual company stock. In the U.S., a REIT must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
What are the different types of REITs?
REITs often specialize in different real estate sectors that can include offices, apartments, warehouses, hospitals, shopping centers, hotels, and mortgages. Some REITs also engage in financing real estate. To qualify as a REIT, a company must comply with certain provisions in the Internal Revenue Code.
How to invest in a REIT?
Much like purchasing other stocks, you can invest in public REITs through a broker. You can purchase shares in a REIT mutual fund or REIT exchange-traded fund. Shares in a REIT are bought and sold on major exchanges.
What are the benefits of investing in a REIT?
REITs offer a way to invest in real estate without having to own, operate, or finance properties. They produce dividends and can be an excellent source of income. They also offer potential diversification and long-term capital appreciation opportunities.
Related Entrepreneurship Terms
- Dividends
- Equity REITs
- Mortgage REITs
- Asset Management
- Commercial Real Estate
