What is a Real Estate Investment Trust (REIT)?

  • December 27, 2022
  • OHI

Real estate investment trusts (REITs) own, manage and finance income-generating real estate across a broad spectrum of property sectors.

To be classified as REITs, these real estate firms must satisfy several criteria and regulations. Most REITs are listed on prominent stock markets. They provide investors with several investing products and advantages.

What is a Real Estate Investment Trust?

A real estate investment trust, or REIT, is a company whose primary business is the ownership and management of income-producing real estate.

Such entities specialise in the ownership and management of substantial real estate and mortgage portfolios. They are involved in operations like renting out properties and collecting rent. The collected rent is then allocated to the shareholders via income and dividends.

Investing in a REIT typically provides investors access to high-priced real estate while also allowing them to collect dividend payments, which can help them grow wealth over time. In this fashion, shareholders can benefit from both capital appreciation and income generation.

Every investor, no matter how big or small can find a lucrative investment opportunity for their money here. To participate in massive commercial real estate developments, modest investors could try to pool their funds with those of other investors.

Data centers, healthcare facilities, retail centers, warehouses, cell towers, apartment buildings, and other types are all included in real estate investment trusts.

How Do REITs Operate and Create Shareholder Value?

Thanks to REITs, shares in commercial real estate portfolios are accessible to a broader range of investors, which were formerly available to high net-worth individuals or through major financial intermediates exclusively.

REITs often concentrate on a particular sector of the real estate market. However, a diversified or speciality REIT’s portfolio may include properties of numerous kinds, such as an industrial complex and a shopping mall.

Most REITs follow a simple and uncomplicated revenue model: they make money by leasing out property and receiving payments in the form of rents on their real estate and then distribute that money to their shareholders in the shape of dividends.

Most REITs distribute 100% of their taxable revenues to their shareholders. Consequently, shareholders are obliged to pay taxes on their income through stake sales and dividends earned. 

Many REITs are listed like equities on global securities exchanges, giving investors access to them anytime during the trading day. As a result, these REITs are regarded highly liquid instruments, trading at high volumes regularly.

Prominent Types of REITs

Overall, REITs are often categorised according to the businesses they engage in. Furthermore, the procedures developed for buying and selling shares contribute to the categorisation of REITs. 

The various real estate investment trusts are outlined as follows:

1. Equity REITs

There is a high demand for REITs like these. Typically, their focus is on the management and operation of commercial properties that generate income. Rents constitute the major contributor to the total income of equity REITs.

2. Mortgage REITs

Lending money to business owners and providing mortgage services are the primary focuses of mortgage real estate investment trusts (mREITs).

To add to that, these REITs frequently buy mortgage-backed securities (MBS). The interest paid on loans for mortgage REITs to business owners is another source of revenue.

3. Hybrid REITs

Such REITs permit the diversification of capital to both mortgage and equity REITs. Thus, investors can spread their risk across a broader range of investments. Therefore, this type of REIT receives revenue from both rent and interest.

4. Private REITs

Trusts like these are essentially private placements available to a limited number of investors (generally institutional investors). Since they are not subject to SEC regulation, these REITs are not listed on national securities markets.

5. Publicly-Traded REITs

Shares of publicly-traded REITs can be purchased and sold by ordinary investors on the national securities market. Their operations are regulated by the SEC.

6. Public Non-Traded REITs

These REITs are also SEC-recognized, although they are not publicly traded. This makes them less liquid than other REITs that trade on public markets. They are considered more steady since they are not affected by market volatility.

What Are the Requirements for a Corporation to Become a Real Estate Investment Trust?

A company needs to meet the following criteria to qualify as a real estate investment trust:

  • At least 75% of the company’s total assets should be invested in real estate.
  • At least 75% of the company’s gross income must originate from either the sale of real estate, the collection of rentals from real property, or interest on mortgages used to finance the real property.
  • Have at least one hundred shareholders currently invested in the company.
  • Engage in the market as a taxable corporation.
  • Have no more than five persons hold more than fifty percent of its shares at any given time.
  • Each year, provide dividends to shareholders amounting to at least 90 percent of the company’s taxable income.
  • Be overseen by a governing body such as a board of directors or trustees. 

Conclusion

With a history of consistent and rising dividends, along with long-term capital appreciation via equity market value increases, real estate investment trusts have provided investors with handsome returns for most cycles over the last several decades, especially when compared to the general stock market and bonds. This makes REITs a lucrative business prospect to create value for the businesses involved and their investors.

About Us

OHI is a sixteen-year-old real estate services company working with 75+ commercial and residential real estate developers, funds and property management companies across USA. Our deep expertise in real estate accounting, financial analysis, lease administration and asset management has helped clients cut associated costs by 40-50%. We currently provide these services to a portfolio of 100,000 units across clients.


OHI provides REIT accounting and related services through our team of experienced real estate portfolio accountants. OHI team members are well versed with US GAAP norms including real estate accounting rules including Real Estate Information Standards (REIS) as per NCREIF. OHI has experience with real estate companies that own and manage office, multifamily, retail, industrial and other real estate investments, including proficiency in both traditional and mortgage REITs. – VIEW MORE

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