A Real Estate Investment Trust, or REIT, is a company that is set up like a mutual fund to offer real estate investment opportunities to a wide range of investors. In a REIT, the company owns and operates some income-producing real estate. A pool of investors contributes funds to the REIT to finance purchases and operations in return for a portion of the income. Congress established REITs in 1960 as part of the Cigar Excise Tax Extension. Before the creation of REITs, traditional real estate investors had to purchase and operate an entire property on their own, making it an investment opportunity only available to wealthy individuals. Modern REITs allow investors to invest a small amount of money to finance a property along with other investors, opening up real estate as a viable option for those without the time or funds to own and operate property by themselves.
REIT portfolios can be composed of a variety of properties, including apartment complexes, warehouses, healthcare facilities, and infrastructures such as cell towers and energy pipelines. Most REITs specialize in a particular sector of real estate, however, some diversified REIT portfolios may consist of a variety of different real estate types. Like other financial instruments, REIT investing comes with its own set of pitfalls and advantages. Some advantages are outlined below. The disadvantages of investing in REITs are as follows:REIT Investing
REIT Example
Pros and Cons of Investing in REITs
REITs can help you gain access to expensive real estate across industries at a fraction of their overall costs
The asset, in this case, real estate, becomes inflation-resistant in the process. According to research from investment firm Morningstar, inflation averaged 8% between 1972 and 2019.
The FTSE Nareit US Real Estate Index Series returned an average of 10.6% during the same period.
Therefore, they are attractive for investors looking for a place to park their funds during stock market downturns.
For example, real estate prices crashed after the 2008 financial recession. Commercial real estate bore the brunt of those losses because lender operations were hemmed in losses and increased regulatory oversight.
Thus, REITs fail to act as an appropriate hedge when the economy is undergoing a recession.
The absence of disclosures can also mean that distributions or dividend payouts may not be made from income generated from operations.
Real Estate Investment Trust (REIT) FAQs
REIT stands for Real Estate Investment Trust.
A Real Estate Investment Trust, or REIT, is a company that is set up like a mutual fund to offer real estate investment opportunities to a wide range of investors.
A pool of investors contributes funds to the REIT to finance purchases and operations in return for a portion of the income.
Modern REITs allow investors to invest a small amount of money to finance a property along with other investors, opening up real estate as a viable option for those without the time or funds to own and operate property by themselves.
REIT portfolios can be composed of a variety of properties, including residential, commercial, apartment complexes, warehouses, healthcare facilities, and infrastructure such as cell towers and energy pipelines.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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