What is a Real Estate Investment Trust?

So maybe you want to dip your toe into the warm waters of real estate investing without all the potential challenges of becoming a full-time landlord. (You know, the late-night calls about leaky faucets or defective dishwashers.) If so, a real estate investment trust might be worth investigating.

What is a Real Estate Investment Trust (REIT)?

In plain English, a real estate investment trust (REIT) is a business that owns, operates, or finances real estate with the primary goal of generating income. This form of real estate trust can include everything from strip malls, office buildings, apartment complexes, hotels, storage facilities, and more.

How REITs Work

REITs pool the capital of a group of investors to make it possible for a single investor to earn dividends from real estate investments, notes to Investopedia, without having to buy, manage, or fund properties alone.

When REITs Were Launched

The same year that John F. Kennedy was elected president, Congress established REITs (in 1960), according to the U.S. Securities and Exchange Commission (SEC), “to allow individual investors to invest in large-scale, income-producing real estate.” In other words, these specialized trusts now offer a way for a single investor to earn a portion of the income produced through commercial real estate ownership – without the hassle (or capital needed) of going out and buying commercial property.

Most REITs, notes the SEC, specialize in a single type of real estate, such as healthcare or residential.

The Difference

Unlike other real estate businesses, a REIT does not develop real estate properties to flip or resell them, notes investor.gov. Instead, a REIT purchases and develops properties primarily intending to operate the property as part of an investment portfolio.

How It’s Going 

Today, REITs collectively own more than $4 trillion in gross assets in the United States, with public REITs accounting for $2.5 trillion in assets, according toNareit, a Washington-based international group representing REIT interests. U.S. public REITs own an estimated 575,000 properties and 15 million acres of timberland across the U.S., notes Nareit.

Do Your Homework

When it comes to REITs, the SEC wants potential investors to conduct research before making investment decisions. How can you do that? First, anyone can review an REIT’s disclosure filings, which include yearly and quarterly reports—plus any offerings—at sec.gov. Specifically, you can research investments here. You should also consider your own financial situation, and consult with a trusted financial adviser before taking the plunge and investing your hard-earned money.

Investing in REITs

After making sure that an REIT will work for your personal needs and financial situation, you can invest in a publicly traded REIT, notes the SEC, which is listed on the major stock exchanges, by:

• Buying shares through a broker, just like other publicly traded securities;

• You can typically buy what’s known as ‘common stock,’ ‘preferred stock,’ or the ‘debt securities’ of a publicly traded REIT;

• You can purchase shares of a non-traded REIT through a broker who is sanctioned to take part in a non-traded REIT offering;

• You can buy shares in a REIT mutual fund (either an index fund or actively managed fund) or REIT exchange-traded fund (ETF).

Potential Risks of Non-Traded REITs

Like so many things in life, there are few guarantees and many potential pitfalls you may not expect when it comes to investing in certain REITs. According to the SEC, non-traded REITs involve special risks, including the inability to be sold readily on the open market. That means if you need to raise money in a hurry, you likely can’t count on a quick sale. Non-traded REITs can also lack transparency, and often don’t offer an estimate of their value (per share) until a year and a half after an offering closes, notes the SEC. That means you may not be able to assess the value of your non-traded REIT investment or its volatility for 18 months or so.

Learn More

The U.S. Securities and Exchange Commission offers an investor assistance hotline that’s answered on weekdays during normal business hours in the Eastern time zone. Call 800-732-0330 for more information on REIT investments.