What is a REIT?
A Real Estate Investment Trust, or REIT, is a pooled investment that invests primarily in income-producing real estate. The majority of REITs trade like stocks on the major exchanges, but there are other REITs that are available only in private markets. REIT investors earn a share of the income produced by the underlying properties – without actually having to go out and buy, manage or finance property themselves.
Are REITs a Good Investment?
Like all investments, REITs should be evaluated through the lens of an investor’s unique needs and tolerance for risk. REITs can be an effective tool for generating income in a portfolio and also have the potential to provide diversification benefits. A financial advisor can help to determine whether investing in REITs might be appropriate for a given investor.
REITs can invest in a variety of different types of real estate assets, and so it is important to consider the type of properties in the portfolio when comparing the performance of two or more different REITs. For example, the performance of a REIT dedicated to investing in retail properties (such as shopping malls) would likely produce different returns compared to a REIT invested primarily in warehouses or data centers.
How Does a REIT Work?
REITs generate returns for shareholders in two ways; income and capital appreciation. The income that a REIT generates is derived from the rent that is generated by the underlying properties in the portfolio, while capital appreciation occurs when the underlying properties increase in value. Of course, there is no guarantee that a REIT will be able to generate positive returns, and it is possible for the underlying properties to depreciate in value. The returns that REIT investors experience will be determined by the success of the underlying properties in the portfolio.
Types of REITs
Equity REITs are the most common type of REIT. They are publicly traded on an exchange just like a stock. Investors can buy and sell shares on the open market, and pricing is typically available in real-time.
Mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.
Public Non-Listed REITs
Public, non-listed REITs (PNLRs) are registered with the SEC but do not trade on national stock exchanges.
Private REITs are offerings that are exempt from SEC registration and whose shares do not trade on national stock exchanges. They are typically only available to very sophisticated investors.