Most REITs specialize in one or just a few sectors:
- Office: These REITs own and/or manage commercial office real estate, leasing space in these properties to tenants or managing office buildings owned by third parties, thereby earning management fees. ...
- Retail: Retail REITs own and lease retail space, including shopping malls and retail centers. ...
- Industrial: Industrial REITs earn rental and management income from industrial facilities. ...
What do most REITs specialize in?
In general, REITs specialize in a specific real estate sector. However, diversified and specialty REITs may hold different types of properties in their portfolios, such as a REIT that consists of both office and retail properties.
What is REIT specialty?
Specialty REITs own and manage a unique mix of property types and collect rent from tenants. Specialty REITs own properties that don't fit within the other REIT sectors. Examples of properties owned by specialty REITs include movie theaters, casinos, farmland and outdoor advertising sites.
How many types of REITs are there?
Retail REITs. Approximately 24% of REIT investments are in shopping malls and freestanding retail. ... Residential REITs. These are REITs that own and operate multi-family rental apartment buildings as well as manufactured housing. ... Healthcare REITs. ... Office REITs. ... Mortgage REITs.
Which type of REITs specialize in owning certain building types?
Most REITs are equity REITs, which own or operate income-producing real estate such as apartment buildings, offices or shopping centers. Equity REITs typically invest in a particular type of property.
Which of the following statements is true about REITs?
Which of the following statements are TRUE regarding REITs? The best answer is D. REITs issue shares of beneficial interest with each certificate representing an undivided interest in the pool of real estate investments.
What is a diversified REIT?
Diversified REITs own and manage a mix of property types and collect rent from tenants. For example, diversified REITs might own portfolios made up of both office and industrial properties, making them ideal for investors looking to gain exposure to a variety of real estate asset types.
What is the most common type of REIT?
An equity REIT is the most common type of REIT. An equity REIT owns and operates the properties in its holdings. With that, an equity REIT often generates revenue through rental income. A mortgage REIT investment generates revenue through interest income from mortgages and mortgage-backed securities.
How many REITs should I own?
Many investors believe a reasonable portfolio allocation to REITs is between 5 percent and 15 percent, and there are two research-based factors that support the idea that allocations to REITs in an optimally-diversified portfolio may be at the higher end of the scale for many investors.
Which of the following REIT types is not likely to own real property?
The answer is: c. While equity REITs invest in (and own) properties, mortgage REITs invest in (and own) mortgages or loans backed by property.
Can REITs develop property?
Unlike other real estate companies, a REIT does not develop real estate properties to resell them. Instead, a REIT buys and develops properties primarily to operate them as part of its own investment portfolio.
How many real estate sectors are there?
The main segments of the real estate sector are residential real estate, commercial real estate, and industrial real estate.
What is a hybrid REIT?
A hybrid REIT is a real estate investment trust that is effectively a combination of equity REITs, which own properties, and mortgage REITs, which invest in mortgage loans or mortgage-backed securities.
What does a REIT do?
What are REITs? Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets.
What are REITs and how do they work?
A REIT (real estate investment trust) is a company that makes investments in income-producing real estate. Investors who want to access real estate can, in turn, buy shares of a REIT and through that share ownership effectively add the real estate owned by the REIT to their investment portfolios.
How do you qualify as a REIT?
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
How do REITs make money?
REITs make their money through the mortgages underlying real estate development or on rental incomes once the property is developed. REITs provide shareholders with steady income and, if held long-term, growth that reflects the appreciation of the property it owns.
How are REITs classified?
There are multiple types of REITs – classified by how they are traded (private vs. public), type of assets (equity vs. mortgage) and what sectors they operate in (retail, data-centers etc.).
What is a REIT?
R eal E state I nvestment T rusts are corporations that own and manage real estate. REITs issue units (much like stock shares ) that gives investors access to the income generated by the REIT’s property portfolio. Because REITs pass virtually all of its income and gains to investors, REITs don’t pay taxes. Instead, investors pay taxes on the REIT distributions they receive.
What is REIT diversification?
REITs provide instant diversification within a real estate sector. You collect rental income from many leases, thereby reducing the impact of any one bad lessee or vacant unit. In other words, REIT diversification contributes to the dependability of income cash flows to investors.
Why did REITs exist?
REITs arose from the desire of investors to passively invest in diversified portfolios of income-producing real estate while avoiding double taxation – that is, corporate taxes paid by the REIT and individual income taxes paid by investors. From the 1880s to the 1930s, trusts similar to REITs did provide pass-through income that avoided corporate taxes. However, double taxation was imposed in the 1930s, precipitating a 30-year struggle to reverse this tax regime.
How to qualify for a REIT?
For a REIT to qualify as a tax-free, pass-through entity, it must satisfy the following criteria: 1 Structured as a corporation or business trust 2 Controlled by a board of trustees or directors 3 Issues fully transferable units 4 Must have at least 100 unitholders 5 Distributes at least 90% of taxable income to unitholders 6 No more than half of the REIT’s units can be held by up to five individuals 7 75% of assets must be invested in real estate (including rents from real property, sale of real property, and income/gains from foreclosures) 8 Receives at least 75% of income from mortgage interest and rents 9 95% of gross income must derive from financial investments (interest, capital gains, dividends and rents) 10 Invest no more than 25% of total assets in securities, and no more than 5% of any one issuer’s securities 11 Own no more that 10% of any one issuer’s outstanding voting shares 12 Limit ownership of stocks in taxable REIT subsidiaries to 20 percent of assets 13 Earns no more than 30% of gross income from sales of properties held less than four years
How much did IIPR pay for the IPO?
It paid $1.55 million in expenses for the IPO. Buyers were subject to a 180-day lockup period before they could sell their units. IIPR sponsored a secondary offering [4] on October 9, 2018 of 2.6 million units at $40 each. As of February 13, 2018, its units traded on the New York Stock Exchange for $65.44 each.
How do REITs work?
REITs allow the average investor to participate in the real estate market through passive investments (through the purchase of company stock or exchange traded funds) and without having to buy and manage properties.
What are REITs specialties?
Specialty: These REITs own and collect rent from a mixed bag of properties, such as movie theaters, billboards, and other properties that don’t conform to major sectors.
What are lodging REITs?
Lodging: The properties owned by lodging REITs include hotels, motels and resorts. These REITs earn income from operating these facilities and by leasing space in the properties to retailers and long-term tenants. The revenue per available room (RevPAR) is a key determinant of success for lodging properties.
What is equity REIT?
Equity REIT – owns properties that provide lease income to unitholders. When an equity REIT sells a property, the unitholders receive a prorated portion of the gain or loss. Equity REITS may also return capital to unitholders, which reduces the cost basis of the REIT.
How long do REITs have to be held?
Normally, private REIT shares must be held for one year before they can be resold to the general public. The following table contrasts the details concerning each of these REIT types:
What is mortgage REIT?
Mortgage REIT – hold mortgage notes on properties, allowing them to collect principal and interest payments from the mortgage holders. The mortgage notes act as liens, meaning the REIT can foreclose and seize a property when the mortgage holder defaults on the loan.
Which properties are more resistant to economic cycles?
Industrial properties are somewhat more resistant to economic cycles, because their size and complexity are usually key to the functioning of large companies that can withstand downturns that destroy many small retailers. Lodging: The properties owned by lodging REITs include hotels, motels and resorts.
What is the biggest threat to retail REITs?
The biggest threat to retail REITs is the growth of online competition. Industrial: Industrial REITs earn rental and management income from industrial facilities. Many types of specialization are possible.
What do REITs invest in?
Some REITs invest directly in properties, earning rental income and management fees. Others invest in real estate debt, i.e. mortgages and mortgage-backed securities.
What is the importance of REITs?
Like any investment, it's important that they have good profits, strong balance sheets and as little debt as possible , especially the short-term kind.
What is real estate investment trust?
Real estate investment trusts own and/or manage income-producing commercial real estate, whether it's the properties themselves or the mortgages on those properties. 1 You can invest in the companies individually, through an exchange-traded fund, or with a mutual fund. There are many types of REITs available.
How do retail REITs make money?
It's important to remember that retail REITs make money from the rent they charge tenants. If retailers are experiencing cash flow problems due to poor sales, it's possible they could delay or even default on those monthly payments, eventually being forced into bankruptcy. At that point, a new tenant needs to be found, which is never easy. Therefore, it's crucial that you invest in REITs with the strongest anchor tenants possible. These include grocery and home improvement stores.
Why are REITs good for the general public?
Not too many people have the ability to go out and purchase a piece of commercial real estate in order to generate passive income , however, REITs offer the general public the capability to do exactly this. Furthermore, buying and selling real estate often takes a while, tying up cash flow in the process, yet REITs are highly liquid—most can be bought or sold with the click of a button.
How much of a REIT must be invested in real estate?
According to the Securities and Exchange Commission, a REIT must invest at least 75% of its assets in real estate and cash, and obtain at least 75% of gross income from sources such as rent and mortgage interest. 5.
Can I invest in real estate with REITs?
Using REITs to invest in real estate can diversify your portfolio, but not all REITs are created equal. Some REITs invest directly in properties, earning rental income and management fees. Others invest in real estate debt, i.e. mortgages and mortgage-backed securities. In addition, REITs tend to focus on a specific sector of properties, ...
What are the different types of REITs?
Equity REITs consist of eight different sub-industries: 1 Diversified REITs —comprised of companies that operate across at least two different property types, as exemplified by one company that operates in both the commercial and residential sectors 2 Industrial REITs — comprised of companies that acquire, develop, own, lease and manage industrial warehouses, distribution centers and other properties 3 Hotel and Resort REITs — comprised of companies that acquire, develop, own, lease and manage hotel and resort properties 4 Office REITs — comprised of real estate firms that acquire, develop, own, lease and manage office locations 5 Health Care REITs — comprised of hospitals, nursing homes, assisted living facilities and other healthcare properties 6 Retail REITs — comprised of companies involved in the acquisition, development, ownership, leasing and management of retail locations 7 Residential REITs — comprised of companies that acquire, develop, own, lease and manage residential properties, including multifamily homes, apartments, manufactured dwellings and student housing 8 Specialized REITs — comprised of companies that acquire, develop, own, lease and manage real estate ventures that do not fit into one of the categories above
How many categories of REITs are there?
While there are two categories of REITs with their associated sub-industries, all operate within a limited number of sectors. Each of these sectors focuses on a distinct property type, which include:
What is a real estate operating company?
Real Estate Operating Companies — comprised of companies that lease or manage real estate properties
What is the second type of REIT?
The second type of REIT is real estate management and development. This category is separated into four sub-industries:
Is REIT income taxed?
For instance, if a REIT distributes 90 percent or more of its taxable income as dividends, it isn’t taxed at the corporate level.
What are the different types of REITs?
There are a number of different types of REITs. Equity REITs tend to specialize in owning certain building types such as apartments, regional malls, office building,s or lodging/resort facilities. Some are diversified and some defy classification—for example, a REIT that invests only in golf courses.
What Qualifies as a REIT?
Most REITs lease space and collect rents, and then distribute that income as dividends to shareholders. Mortgage REITs (also called mREITs) don't own real estate, and instead finance real estate. These REITs earn income from the interest on their investments, which include mortgages, mortgage-backed securities, and other related assets.
Why do REITs pay dividends?
REITs are real estate companies that must pay out high dividends in order to enjoy the tax benefits of REIT status. Stable income that can exceed Treasury yields combines with price volatility to offer a total return potential that rivals small-capitalization stocks.
What is REIT status?
By having REIT status, a company avoids corporate income tax. A regular corporation makes a profit and pays taxes on its entire profit, then decides how to allocate its after-tax profits between dividends and reinvestment. A REIT simply distributes all or almost all of its profits and gets to skip the taxation.
How do REITs achieve economies of scale?
Economies of Scale. REITs typically seek growth through acquisitions and further aim to realize economies of scale by assimilating inefficiently run properties. Economies of scale would be realized by a reduction in operating expenses as a percentage of revenue. But acquisitions are a double-edged sword.
Why are interest rates rising in REITs?
A rise in interest rates usually signifies an improving economy, which is good for REITs as people are spending and businesses are renting more space. Rising interest rates tend to be good for apartment REITs as people prefer to remain renters, rather than purchase new homes.
What is REIT investment?
The Bottom Line. A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing properties. By law, 90% of a REIT's profits must be distributed as dividends to shareholders. Here, we take a look at REITs, their characteristics, and how to evaluate a REIT.
An overview of REITs
Real estate investment trusts are companies that own, operate or finance income-producing real estate across a wide range of sectors, including apartments, hotels, shopping malls, office buildings and warehouses.
Types of REITs
Real estate investment trusts can be divided into three general categories that investors can purchase: equity, mortgage, and hybrid REITs.
Advantages of owning a REIT
One of the benefits of investing in a real estate investment trust is diversification since REITs tend to be less volatile than traditional stocks.
Risks of owning a REIT
One of the drawbacks to earning a steady flow of dividends is the taxes you’ll need to pay on them—these dividends are generally taxed as ordinary income.
In sum: the basics of investing in REITs
While they carry risk, real estate investment trusts can be an excellent way to diversify your portfolio. In addition, REITs can make an excellent choice for investors who need income or want to reinvest their dividends and let their gains compound over time.
Overview
Historical Returns of REITs
Retail REITs
- Most REITs specialize in one or just a few sectors: 1. Office: These REITs own and/or manage commercial office real estate, leasing space in these properties to tenants or managing office buildings owned by third parties, thereby earning management fees. Office REITs do well when interest rates are low, because issuing new debt for expansion isn’t ...
Residential REITs
- Real estate investment trusts (REITs) are a key consideration when constructing any equity or fi…
In short, their ability to generate dividend income along with capital appreciation makes them an excellent counterbalance to stocks, bonds, and cash. - REIT investing involves real estate investment trusts. REITs own and/or manage income-produci…
Where REIT investing is concerned, you can invest in the companies individually, through an exchange-traded fund, or with a mutual fund. There are many types of REITs available.
Healthcare REITs
- Real estate investment trusts are historically one of the best-performing asset classes. The FTS…
Over a 25 year period, the index returned 9.05% compared to 7.97% for the S&P 500 and 7.41% for the Russell 2000. 2 Historically, investors looking for yield have done better investing in real estate than fixed income, the traditional asset class for this purpose. A carefully constructed portfolio s…
Office REITs
- Approximately 24% of REIT investments are in shopping malls and freestanding retail. 3 This rep…
When considering an investment in retail real estate, one first needs to examine the retail industry itself. Is it financially healthy at present and what is the outlook for the future? - It's important to remember that retail REITs make money from the rent they charge tenants. If re…
At that point, a new tenant needs to be found, which is never easy. Therefore, it's crucial that you invest in REITs with the strongest anchor tenants possible. These include grocery and home improvement stores.
Mortgage REITs
- These are REITs that own and operate multi-family rental apartment buildings as well as manufa…
For instance, the best apartment markets tend to be where home affordability is low relative to the rest of the country. In places like New York and Los Angeles, the high cost of single homes forces more people to rent, which drives up the price landlords can charge each month. As a result, the … - Within a specific market, investors should look for population and job growth. Generally, when th…
As long as the apartment supply in a particular market remains low and demand continues to rise, residential REITs should do well. As with all companies, those with the strongest balance sheets and the most available capital normally do the best.
The Keys to Assessing Any REIT
- Healthcare REITs will be an interesting subsector to watch as Americans age and healthcare co…
The success of this real estate is directly tied to the healthcare system. A majority of the operators of these facilities rely on occupancy fees, Medicare and Medicaid reimbursements as well as private pay. As long as the funding of healthcare is a question mark, so are healthcare R… - Things you should look for in a healthcare REIT include a diversified group of customers as well …
Generally, an increase in the demand for healthcare services (which should happen with an aging population) is good for healthcare real estate. Therefore, in addition to customer and property-type diversification, look for companies whose healthcare experience is significant, whose balan…
Advantages and Disadvantages of REIT Investing
- Office REITs invest in office buildings. They receive rental income from tenants who have usuall…
What is the state of the economy and how high is the unemployment rate? - What are vacancy rates like?
How is the area in which the REIT invests doing economically?
How to Invest in REITs
- Approximately 10% of REIT investments are in mortgages as opposed to the real estate itself. 3 …
Just because this type of REIT invests in mortgages instead of equity doesn't mean it comes without risks. An increase in interest rates would translate into a decrease in mortgage REIT book values, driving stock prices lower. - In addition, mortgage REITs get a considerable amount of their capital through secured and uns…
In a low-interest-rate environment with the prospect of rising rates, most mortgage REITs trade at a discount to net asset value per share. The trick is finding the right one.
Are REITs Good Investments?
- Keep in mind the following points when assessing any REIT.
REITs are true total-return investments. They provide high dividend yields along with moderate long-term capital appreciation. 4 Look for companies that have done a good job historically at providing both. - Unlike traditional real estate, many REITs are traded on stock exchanges. You get the diversifica…
Depreciation tends to overstate an investment's decline in property value. Thus, instead of using the payout ratio used by dividend investors to assess a REIT, look at its funds from operations (FFOs) instead. This is defined as net income less the sale of any property in a given year and de…
What REITs Should I Invest in?
- As with all investments, REITs have their advantages and disadvantages. One of the biggest ben…
Another benefit is portfolio diversification. Not too many people have the ability to go out and purchase a piece of commercial real estate in order to generate passive income. However, REITs offer the general public the capability to do exactly this. - Furthermore, buying and selling real estate often takes a while, tying up cash flow in the process…
There are some drawbacks to REITs of which investors should be aware, most notably the potential tax liability REITs can create. Most REIT dividends don't meet the IRS definition of qualified dividends. That means that the above-average dividends offered by REITs are taxed at …
How Do You Make Money on a REIT?
- As referenced earlier, you can purchase shares in a REIT that's listed on major stock exchanges. …
To do so, you must open a brokerage account. Or, if your workplace retirement plan offers REIT investments, you might invest with that option. Check with your plan administrator to see what REIT investments are available. - If you decide to open a brokerage account (and don't already have one), the process is straightfo…
Depending on which broker you choose, you'll be able to sign up online at their website or mobile app, or in person at a branch location.
Can You Lose Money on a REIT?
- Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.
Are REITs Safe During a Recession?
- Each type of REIT has its own risks and upsides depending on the state of the economy. REIT investing through a REIT ETF is a great way for shareholders to engage with this sector without needing to personally contend with its complexities.
The Bottom Line
- Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.