REITs

What is a REIT?

Rather than directly purchasing income-producing commercial properties such as industrial warehouses, office buildings, retail shopping centers or apartment buildings, many investors have turned to professionally managed real estate investment trusts (REITs), real estate mutual funds and other investment products. Through these products, real estate is easier to own than ever. Of these various investment vehicles, REITs are one of the most common ways to gain exposure to commercial real estate.

  • Congress created REITs in the United States in 1960 as a way to make investments in large-scale, income-producing real estate accessible to individual investors. Prior to the creation of REITs, these types of investments were limited to institutions and wealthy individuals having the financial wherewithal to undertake direct real estate investment.
  • Most REITs do not pay corporate income tax and all REITs must annually distribute at least 90% of taxable income to shareholders — making them one of the most robust current income vehicles.

Types of REITs

There are two primary types of REITs available to individual investors — publicly traded and non-traded.

Publicly Traded REITs

Publicly traded REITs are typically traded on a national exchange, like the New York Stock Exchange (NYSE). They are registered with the Securities and Exchange Commission (SEC) and subject to the SEC’s regulations — providing transparency to investors through quarterly filings and annual reports. Publicly traded REITs offer investors liquidity as their shares can be bought and sold similar to other types of shares traded on an exchange, but the share price is subject to the risk and volatility the exchange-traded market can produce.

Non-Traded REITs

Non-traded REITs are very much like their publicly traded counterparts. Although they do not trade on an exchange, non-traded REITs have the same transparency through SEC filings. While a publicly traded REIT’s share price changes with market conditions, a non-traded REIT sells shares at a set price to investors over a specified offering period, during which the REIT is not traded. Therefore, non-traded REITs may help shield investors from market volatility. Another difference from publicly traded REITs is that non-traded REITs offer investors limited liquidity according to a redemption schedule.