February 4, 2023

How Does a Real Estate Investment Trust (REIT) Work?

6 types of REIT Investment

Companies that hold or finance revenue real estate across a variety of property industries are known as REITs or real estate investment trusts.  To be eligible to become REITs, these real estate firms must fulfill a number of standards.

The majority of REITs trade on significant stock exchanges and provide investors with a number of advantages. A business that owns, manages, or finances revenue real estate is known as a real estate investment trust (REIT). 

REITs offer a mutual fund-like investment opportunity that enables regular investors—rather than just Wall Street, banks, and hedge fund managers gain access to valuable real estate. And generate dividend-based income, generate total returns, and support the expansion, prosperity, and revitalization of communities.

This Is How REITs Work

Congress established REITs, or real estate investment trusts, in 1960 to provide everyone with the chance to profit from investing in real estate that generates income. Anyone may own or finance real estate through REITs in the same way that one may invest in other sectors of the economy: by purchasing shares. 

The investors of a REIT receive a portion of the revenue generated by real estate investment, similar to how shareholders gain from owning shares in other firms, without having actually to go out and purchase or finance real estate.

Both commercial and residential buildings may be financed by REITs. Interest earned on investments in homes or mortgage-backed securities provides the majority of REIT income.

Additionally, REITs may register publicly with the Securities Exchange Commission (SEC) and list and trade their shares on significant stock exchanges. 

Despite not having their shares published or traded on significant stock exchanges, they may be SEC-registered as publicly traded companies. Or, they could be privately held businesses.

How To Invest in REITs: 5 Steps

  1. Know what a REIT is and how it operates.
  2. Be knowledgeable about the dangers of investing in REITs.
  3. Examine the benefits and disadvantages of REITs.
  4. If you don’t already have an account, open one at a trustworthy brokerage.
  5. Choose a REIT after doing some research, and then keep an eye on it.

You can invest in a publicly traded REIT that is listed on a large stock market by purchasing shares through a broker. 

You can purchase shares of the non-traded REIT services through a broker who participates in the offering. In addition, you can purchase mutual fund or exchange-traded fund shares of a REIT.

5 types of REIT Investment

  • Equity REITs:  The majority of REITs are equity REITs, which own and operate properties that generate income. Rent is the primary source of income (not by reselling properties).
  • Mortgage REITs: Mortgage REITs provide capital to owners and operators of real estate either directly through mortgages and loans or indirectly through the purchase of securities backed by mortgages.
  • Publicly Traded REITs: Individual investors can buy and sell shares of publicly traded REITs that are listed on a national securities exchange. The U.S. Securities and Exchange Commission oversees their regulation (SEC).
  • Public Non-Traded REITs: Although they are also SEC-registered REITs, they do not trade on regional stock exchanges. They are therefore less liquid than REITs that are traded openly. Nevertheless, because they are not impacted by market movements, they tend to be more stable.
  • Private REITs: These REITs do not trade on national securities exchanges and are not registered with the SEC. Private REITs can typically only be sold to institutions.

Why REITs Make A Good Investment?

REITs are a perfect addition to any investment portfolio because they provide a number of advantages to investors. These consist of appealing income, liquidity, transparency, and diversification, in addition to competitive long-term performance.

  • Long-term performance that is competitive

In the past, REITs have outperformed stocks, especially over extended periods of time. For instance, REITs, as determined by the FTSE Stock Index, have generated a composite annual average net profit (stock price growth plus dividend income) of 11.4% over the past 45 years. That is only marginally less than the 11.5% annual return on the S&P 500 throughout that time.

  • Monthly income

The majority of REITs offer appealing dividends, which is one reason why they have produced strong total returns over a long period. 

For instance, the average REIT paid over 3% as of the middle of 2021, which is more than twice the dividend yield of the equities in the S&P 500.

Since it accounts for the majority of a REIT’s total return over the long term, that income accumulates over time.

  • Diversification

By allowing clients to diversify their portfolios throughout the commercial real estate market, REITs assist investors’ ties to the bond and stock markets to be less pronounced. Without compromising returns, diversification lowers an investor’s risk profile.


  • What are the pros and cons of REITs?

Ans: Liquidity, diversification, & unearned income in the form of substantial dividends are advantages of investing in REITs.  Taxes, fees, and economic uncertainty caused by changes in interest rates or real estate market trends are some drawbacks of a REIT investment.

  • Are REITs a good investment 2022?

Ans: Due to rising interest rates and the weak economy, the FTSE Nareit All Equity REIT index has fallen 23% this year.

  • Can you make a living on REITs?

Ans: Of course, the quantity you make is significantly influenced by the REIT’s management’s success as well as economic conditions. A REIT can frequently offer a respectable return of 5–10% or more.

Bottom Line

The bulk of REITs operates in a rather straightforward way. The concept of investing is enticing since a REIT’s business strategy is simple to understand. Any business can produce cash that is distributed to shareholders by leasing space and collecting rent therefrom (dividends). 

While financial outcomes are reported, much like any other publicly traded company, REITs are required to declare earnings for each share in accordance with net income, as defined by generally accepted accounting standards (GAAP).