Investor Facts: What Is A Real Estate Investment Trust?

A real estate investment trust (REIT) type of security that holds real estate investments.

Much the way a mutual fund holds shares of many companies, a real estate investment trust (REIT) owns real estate investments.

It holds in the form of direct ownership (equity REITs) or indirectly by holding mortgages (mortgage REITs). Or, it could be a mix of the two strategies (hybrid REITs).

A REIT is a security that provide a simple way to add exposure to real estate to your investment account. In addition, they offer tax privileges that typically result in higher yields for investors.

Unlike with a stock that pays dividends, the majority of income from the real estate portfolio is not subject to income taxes at the corporate level. Rather, it largely flows through to be taxed only at the level of the individual investor.

REITs can invest in all types of real estate: residential, retail, industrial — even timber land. Some invest in properties to rent or sell at a profit while others seek income by owning mortgages. A third, hybrid type does both.

A REIT can trade on a public stock exchange (called public REITs) or be in the form of a private investment offering.

Public REITs resemble ordinary stocks, provide a liquid way to add real estate to a portfolio and allow for easy rebalancing. Real estate mutual funds are made up of publicly traded REIT investments.

Powerful diversifier

Real estate is a powerful diversifier for a portfolio. It provides a real asset whose long-term returns have kept up with inflation.

While the past provides no guarantee for the future, there have been many shorter periods over the last 15 years where real estate buoyed portfolios during downturns in the stock market.

In addition, income from real estate can provide a relatively high yield compared to most income investments.

Over the long run, as inflation increases often so do rents, though in the short run this may not be the case.

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