What is a REIT?

A Real Estate Investment Trust (“REIT”) is a “pass-through” entity that invests in qualified real estate assets. REITs are entitled to preferential tax treatment and can avoid most entity-level federal tax by distributing 90% of the REIT’s taxable income to investors and complying with detailed REIT rules set forth in the Internal Revenue Code provisions. In order to qualify for REIT status, the company must meet several criteria including:

  • Distribute at least 90% of REIT’s taxable income
  • Be jointly owned by at least 100 persons
  • No more than 50% of the shares can be held by five or fewer individuals during the last half of each taxable year
  • At least 75% of total investment assets must be in real estate
  • Derive at least 75% of gross income from rents or mortgage interest
  • Managed by a board of directors or trustees

Types of REITs

Equity REITs

Own and manage property.

Mortgage REITs

Deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs

Invest in multiple real estate asset types.

Public vs Private REIT

Public REITs
  • Trade on a public stock exchange (Provide instant liquidity as they buy & sell share every day)
  • Trading daily also means investors can push price up or down, reflecting current market sentiment and regardless of actual market value
  • Increased costs to requirements of a publicly listed stock
  • History of more volatile pricing
Private REITs
  • Not traded on a public stock exchange (Generally offering only 30 day liquidity)
  • Value REIT is based on the value of underlying real estate (not a “traded” market price)
  • No additional “public listing” related regulatory costs
  • Stable, rational pricing = lower volatility