What is a Real Estate Investment Trust (REIT)?

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There are a number of ways to invest and make money in real estate. For example, you could:

Buy a home and rent it out as a vacation property. For instance, as a way of generating passive income.
Purchase a house or apartment complex and rent it out for residential living.
Acquire a foreclosure or fixer-upper, renovate it and flip it for a profit.

All of these methods are ways of generating income and wealth through real estate. However, the challenge with each of these options is they all require a significant amount of cash to get started.

So how do you start investing in real estate if you don’t have a bunch of cash? Consider REIT investing, investing in a Real Estate Investment Trust.

What is a Real Estate Investment Trust?

A REIT is a company that owns and operates or finances real estate properties. As a result, they make their money from either renting out the properties they own or by leveraging the mortgages associated with real estate.

A Real Estate Investment Trust is another way of indirectly investing in real estate, without having to secure upfront capital to purchase a property. Investing in a REIT company allows smaller investors to pool their money to make purchases. If you are looking for a different way of investing in real estate a REIT security may be the way to go.

Here are the key things you need to know about REITs.

REITs can be public or private companies. Public companies are traded in financial markets and have a ticker symbol just like a stock.
There are two types of REITs. Equity REITs purchase real estate with the purpose of making money from the leasing/rental of those properties. Mortgage REITs make money from the purchase and sale of mortgages used to secure real estate.
Equity REITs are the most popular type of Real Estate Investment Trust. In general, these companies own, operate and manage large office complexes, apartment buildings, and strip malls. (to name a few)
REITs have a special tax status with the IRS, which requires them to pay out 90% of their income to shareholders. Therefore income is generally paid out in the form of dividends. (paid monthly or quarterly)
Dividends are generally taxed as ordinary income.
Equity REITs provide investors diversification. Similarly to a mutual fund that provides diversification through different stocks and bonds, equity REITs can provide diversification based on the property types they own and where they are located. In addition, REITs have a low correlation to the performance of stocks and bonds.
Mortgage REITs are often viewed as more volatile. This is due to the fact that their business plan, which is based on mortgages, is influenced by interest rates.

How to Invest in REITs

To start investing in REITs, consider these options, for example:

Buy specific REIT company shares, like Prologis (PLD) which owns distribution centers and warehouses in the transportation business. Public Storage (PSA) operates storage facilities in the U.S. and Europe. HCP, Inc. (HCP) operates facilities associated with the healthcare industry.
Invest in a mutual fund or ETF with a portfolio of REITs as a means of providing diversification. You can view U.S. News recommended funds here.

In conclusion, Real Estate Investment Trusts can be a great way of indirectly investing in real estate. And diversifying your investment portfolio. History has shown REITs to be a solid investment. Weathering the financial markets and consistently paying out dividends.