A real estate investment trust is a company that owns and operates real estate and related properties. Much like a mutual fund, the REIT sells shares that entitle holders to receive pass-through earnings in the form of distributions. The earnings are generated from rental income and from capital gains on the sale of REIT properties. REITs must distribute at least 90 percent of annual earnings to pass cash flows (and taxes) through to shareholders. They also can return capital to shareholders, lowering the cost basis of holdings. REITs typically hold real assets, such as apartments and commercial properties, and/or mortgage debt. Many REITs specialize in a particular source of earnings and specific types of real estate: industrial, commercial and residential.
The Three Types of REITs
The three types of REITs are:
REIT Types
| ATTRIBUTE | EXCHANGE-TRADED | NON-TRADED | PRIVATE |
|---|---|---|---|
| SEC Registration | Registered | Registered | Private |
| Reporting | Reporting Securities Act of 1933, requires periodic, audited financial reports. Investors can read financial reports on the SEC’s EDGAR database. As per exchange-traded REITs, plus must regularly report net asset value according to rules set by Financial Industry Regulatory Authority. Investors can read financial reports on the SEC’s EDGAR database. Exempt from disclosure requirements. Investors do not know what properties the REIT owns and therefore don’t know level of diversification and risk. | As per exchange-traded REITs, plus must regularly report net asset value according to rules set by Financial Industry Regulatory Authority. Investors can read financial reports on the SEC’s EDGAR database. | Exempt from disclosure requirements. Investors do not know what properties the REIT owns and therefore don’t know level of diversification and risk. |
| Liquidity | Liquid. Listed on national stock exchanges like NYSE and NASDAQ. Shares easily bought and sold at current auction price. | Liquid. Listed on national stock exchanges like NYSE and NASDAQ. Shares easily bought and sold at current auction price. Relatively illiquid. Unlisted on stock exchanges, trade via secondary marketplaces, broker/dealers and mini-tenders. Issuer may periodically redeem shares at arbitrary price after minimum holding period, and liquidate, list or merge the REIT after a set period. Illiquid. Trade through private placements and crowdfunding to accredited investors (who must meet certain income or net wealth requirements) and to qualified institutional buyers. Can be publicly resold after a holding period of one year. Issuer may periodically redeem shares. Prices may not reflect demand/supply. | Liquid. Listed on national stock exchanges like NYSE and NASDAQ. Shares easily bought and sold at current auction price. Relatively illiquid. Unlisted on stock exchanges, trade via secondary marketplaces, broker/dealers and mini-tenders. Issuer may periodically redeem shares at arbitrary price after minimum holding period, and liquidate, list or merge the REIT after a set period. Illiquid. Trade through private placements and crowdfunding to accredited investors (who must meet certain income or net wealth requirements) and to qualified institutional buyers. Can be publicly resold after a holding period of one year. Issuer may periodically redeem shares. Prices may not reflect demand/supply. |
| Management | Usually internally advised and managed | Usually internally advised and managed | Usually internally advised and managed |
| Fees and commissions | Commissions like those for stock shares | Typically includes up-front sales fees and commissions, capped by regulations at 15 percent. May also include periodic and redemption fees. | Varies by issuer, but often structured as 2 percent of assets under management and 20 percent of profits. |
| Minimum investment | A single share | Usually $1,000 to $2,500 | Retail-oriented REITS: $1,000 to $25,000. Institutional REITs: $100,000+ |
| Directors | Independent directors predominate, as per stock exchange rules. Usually have independent committees for compensation, audits and director nominations. | Must adhere to state regulations patterned after rules from the North American Securities Administrators Association that require a majority of independent directors and committees. | Exempt from most regulations, but must adhere to anti-fraud rules. |
| Performance | Sufficient disclosed data to perform independent analysis and compare to standard benchmarks. | Investors entitled to periodic performance data. Two approved methods to estimate share value. Lack of standard benchmarks. Returns (and risk) more likely to be boosted by leverage (borrowing money to increase investments). Must distribute dividends from inception, often requiring return of capital. | Dark secret. Studies indicate that private REITs underperform public ones. |
REITs provide a way for investors to diversify their portfolios into real estate assets under professional management. They are tax efficient because they pass tax liabilities through to shareholders. They have the potential for returns higher than those available from government bond funds because they are riskier. The returns from a REIT can be relatively uncorrelated from those of stock and bond markets. Accredited investors can invest in all three kinds of REITs, while everyone can invest in public and non-traded REITs.