Buying a rental property is not the only way to invest in real estate. Real estate investment trusts, commonly called REITs, allow investors to gain exposure to portfolios of income-producing properties or real estate-related financing.
Many REITs are publicly traded, which means investors can buy and sell shares through a brokerage account. But a REIT is still an investment with risks, and it does not provide the same ownership experience as purchasing a property directly.
What Is a REIT?
A REIT is a company that owns, operates or finances income-producing real estate. Depending on its structure, it may invest in apartments, offices, shopping centers, warehouses, hotels, healthcare properties or other real estate assets.
Equity REITs generally own and operate properties. Mortgage REITs generally provide financing for real estate or invest in mortgage-related assets.
These categories can have different business models and risk profiles. Investors should understand what a particular REIT owns or finances before buying shares.
How Investors May Earn Returns
REIT investors may receive dividends and benefit if the market value of the shares increases. Income from properties can support distributions, but rental income is affected by occupancy, tenant demand, operating expenses and economic conditions.
A REIT's share price can also decline even if it continues paying dividends. Higher interest rates, refinancing costs, weak property markets and changes in investor sentiment can affect valuations.
A dividend should never be treated as guaranteed.
Publicly Traded and Non-Traded REITs
Publicly traded REITs are listed on stock exchanges and generally offer more accessible daily trading. Non-traded REITs are not listed on a national securities exchange and can have limited liquidity, more complicated valuation practices and restrictions on redemptions.
Investors should read offering documents carefully, especially when considering a product that is not exchange-traded.
Fees and Tax Treatment
REITs may have operating expenses and other costs that affect investor returns. The tax treatment of distributions can also differ from that of ordinary qualified stock dividends.
Some REIT distributions may be classified as ordinary income, capital gains or return of capital, depending on the circumstances. Investors should review annual tax forms and the REIT's distribution information.
The Bottom Line
REITs can provide exposure to real estate without requiring an investor to purchase and manage a building. But property-market conditions, interest rates, leverage, fees and tax treatment all matter. Investors should examine the REIT's structure and holdings rather than assuming every real estate investment trust offers the same income or risk profile.
This article is for informational and educational purposes only and should not be considered personalized financial, investment or tax advice.
