Real Estate Investment Trusts (REITs): Definition & Types

Instructor: Janice Chretien
Real estate investment seminars advertising that you can '~'get rich quick'~' are everywhere. For those wanting to invest in real estate, a trust may be a safer bet. This lesson will introduce you to Real Estate Investment Trusts (REITs), explain the different types, and explain how to get started investing.

Investing in Real Estate

Everyone has come across an advertisement for a ''get rich quick real estate seminar'' at some point in recent years. There is no shortage of real estate gurus selling their books, podcasts, workshops, and coaching sessions for thousands of dollars to eager novice real estate investors.

Do their strategies really work? Before spending thousands on ''get rich quick'' practices, novice investors should consider if Real Estate Investment Trusts would be a better way to grow hard-earned cash.

What are REITs?

Signed into law as an amendment to the Cigar Excise Tax Extension of 1960, Real Estate Investment Trusts (REITs) allow individuals to invest in income-producing real estate without the expense of purchasing and maintaining actual property.

Unlike a real estate developer who builds or rehabs commercial property to sell, a REIT is a company that invests in real property for the purpose of operating, maintaining, and producing income as part of an investment portfolio. REITs typically specialize in a type of real property such as residential apartments, retail centers, office buildings, industrial complexes, healthcare facilities, and warehouses.

To qualify as a REIT, the following criteria must be met:

  • a majority of the company's assets and income must be real estate investment related
  • the company will pay 90% of the taxable income as dividends to its shareholders annually
  • the company will operate as a taxable corporation
  • the company will be managed by trustees or a board of directors
  • shares will be transferable
  • at least 100 shareholders after the first year of operation
  • at least half of the shares must be held by six or more individuals during the second half of the year

Types of REITs

There are three types of REITs; equity, mortgage, and hybrid.

Equity REITs operate and manage income-producing property. This is the most popular type of REIT and usually earns income from rents.

Mortgage REITs lend money to property owners and operate like a mortgage. Mortgage REITs can also acquire mortgage-backed securities. Unlike equity REITs that earn money from activities associated with commercial property, mortgage REITs earn money from interest on the money lent to property owners.

Hybrid REITs diversify their portfolio by investing in both equity REITs and mortgage REITs. The income for hybrid REITs comes from both rent and interest.

Investing in REITs

Most REITs are registered with the Securities and Exchange Commission (SEC). REITs can be traded publicly and non-publicly.

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