Real Estate Investment Trust (REIT) - Explained
What is a Real Estate Investment Trust?
Written by Jason Gordon
Updated at April 17th, 2022
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What is a Real Estate Investment Trust?
Investments made in dividend paying fixed assets, specifically in real estate, are called Real Estate Investment Trust (REIT). REITs raise capital through an Initial Public Offering (IPO), these funds are then used to buy and develop the estate, accumulate assets, and provide dividends by way of rents, leases, and sale of property. IPOs for REITs are governed by the same rules as other securities. The difference is in the underlying investment structure. REITs can be bought in units that offer ownership in a managed pool of real estate.
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How Does a REIT Work?
REITs are traded on all major public exchanges and purchasing signifies ownership of shares in an investment entity. Owning a REIT implies ownership in a fraction of all the managed real estate properties. REITs differ from securities in that they're like mutual funds and distribute profits as dividends directly back to investors.
REITs raise capital via IPOs, and share trading, providing investors indirect access to real estate properties. Public REITs are bought and sold on the stock markets while Private REITs seek individual or accredited investors via Private Prospectus Placements (PPMs). All REITs must distribute 90% of their taxable profits as dividends back to investors, as per legal norms. Income is based on renting, leasing, property management fee, and selling developed properties. Mortgage REITs make their income chiefly by way of interest and installments that borrowers pay on mortgaged properties and related debt products. They're more like bond investments than regular real estate funds.
Advantages of REITs
REITs diversify investors portfolio and provide access to a host of real estate properties that offer rich returns on investments in the form of regular dividends. Investors do not have to deal with the operational overload of owning and developing real estate properties, this is managed by the trust. REITs are valuable liquid assets that can be sold off with ease in the equities market, unlike actual real estate. The underlying tangible assets like land, buildings, commercial estates and more make them very safe and non-volatile investments with guaranteed principal recovery in most eventualities. They grow at a slower rate than regular investment funds but are bankable and solid on returns.