Definition
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate across various sectors, such as residential, commercial, and industrial properties. REITs allow investors to buy shares in large-scale real estate portfolios without directly owning property.
Explanation
REITs function like stocks, enabling individuals to invest in real estate without managing properties themselves. They are required by law to:
- Pay at least 90% of taxable income to shareholders as dividends.
- Be publicly traded on stock exchanges or available as private/non-traded funds.
- Own and manage income-producing properties like apartment complexes, office buildings, shopping centers, and hotels.
Types of REITs:
- Equity REITs – Own and manage physical real estate properties.
- Mortgage REITs (mREITs) – Invest in real estate loans and mortgage-backed securities rather than physical properties.
- Hybrid REITs – Combine elements of both equity and mortgage REITs.
- Publicly Traded vs. Private REITs – Some REITs are listed on stock exchanges, while others are privately held.
Advantages of Investing in REITs:
✅ Passive income through regular dividend payouts.
✅ Portfolio diversification with exposure to real estate markets.
✅ Liquidity – Shares can be bought and sold like stocks.
❌ Risks of REITs:
- Market volatility – Prices fluctuate based on economic trends.
- Interest rate sensitivity – Higher rates can reduce REIT stock values.
- Lower capital appreciation compared to direct property ownership.
Example
An investor buys $10,000 worth of shares in a commercial REIT specializing in shopping malls. The REIT pays an annual dividend of 5%, generating $500 in passive income per year, without requiring the investor to manage or finance any real estate directly.