A real estate investment trust is a company that buys, develops, manages, and/or sells real estate such as skyscrapers, shopping malls, apartment complexes, office buildings and housing developments. Investors in REITs put their money into a professionally managed portfolio of real estate. REITs make money from rental income, profits from the sale of the property, and other services provided to tenants. REITs can offer investors high yields, current income, and moderate growth.
There are several types of REITs. An equity REIT’s main business is buying, renovating, managing, maintaining, and selling real estate. It may invest broadly or may be dominated by a particular segment of the market--for example, retail space or apartment buildings. Mortgage REITs make loans or invest in existing mortgages. Hybrid REITs combine the characteristics of equity and mortgage REITs. Additional corporate structures (e.g., the UPREIT and DownREIT) were developed in the early 1990s; these REITs typically focus on providing tax benefits to their shareholders.
A REIT may trade on the major exchanges, just like stocks, or may be what is called a “non-traded REIT.” There are substantial differences between the two types. Publicly traded REITs are relatively easy to buy and sell, but the same is not true for non-traded REITs. Your ability to redeem shares of a non-traded REIT may be limited, and they may be worth less than you originally paid for them. Also, front-end fees can exceed those of exchange-traded REITs. However, non-traded REITs are subject to similar SEC disclosure requirements.
Investing in real estate can provide excellent diversification to a portfolio. Before you invest in a REIT be sure to discuss the risks and potential rewards with your financial advisor.