Over the years I’ve been asked many questions about the different between a REIT, or real estate investment trust, and a ‘regular’ real estate investment. Although investing in REITs is not the same as investing in physical assets like rental properties, they are definitely related. As such, the goal of this page is to shed some light on the differences. Please see the video at the bottom of this page for more detailed information.
DIFFERENCE BETWEEN A REIT AND INVESTMENT PROPERTIES
So, what exactly is a REIT? Well the formal definition is that it represents a tax designation for a corporation that invests in income-producing real estate assets. This could involve operating the real estate assets as well as handling real estate financing activities. The company can then sell shares of its real estate portfolio to investors on the major stock exchanges. Essentially, it is a “real estate mutual fund,” and corporations typically do this in an effort to reduce their overall corporate tax liability.
So the primary difference is that if you invest in traditional real estate, you own the physical asset and must be accountable for the property management – whether you’re a landlord or you hire a property manager. If you invest in REITs, it’s essentially like investing in the stock market – there is no management or control, you simply want to buy low and sell high. The only thing you’ll need to worry about is paying federal taxes on the dividends received.
TYPES OF REITs
REITs have been around since 1960. As of the time of this writing, there are roughly 150 publically traded REITs in the US, with a combined market equity cap of $390 billion. The 2 major categories are equity REITs and mortgage REITs, and each of these can be broken down into segments like industrial, apartment, office, self storage, hotel, retail, and more.
REQUIREMENTS FOR CORPORATIONS TO BECOME A REIT
There are a few requirements that any REIT must follow. One is that the company must have the vast majority of its assets wrapped up in real estate investments.
The other major requirements is that the real estate investment trust distribute at least 90% of its taxable income annually as dividends to its shareholders / investors (hence why it’s a vehicle for corporate entities to reduce their overall tax liability…in fact, most REITs distribute 100% of their taxable income to eliminate 100% of their tax liability).
BENEFITS OF REAL ESTATE INVESTMENT TRUST INVESTING
There are several advantages of this type of investment vehicle. One is that the real estate investment trust market has outperformed most other major equity markets for 30 years running. Additionally, the dividend distributions can provide a nice passive income stream. They also offer the benefit of financial transparency.
Relative to investment properties, REITs typically operate commercial property all across the US which provides an opportunity for geographic diversification. Also, REITs are extremely liquid and thus are easier to sell compared to traditional properties. And of course, there’s no need to be a landlord!
A REIT or real estate investment trust is a good way to invest in real estate without having to do any of the traditional legwork involved in buying, selling, and managing traditional real estate assets. So although you’re unlikely to build as much wealth with REITs compared to traditional investment properties, they can still be a nice way to diversify your overall investment portfolio quickly and easily.
As promised, here is a video that goes into a little more detail on the REIT market.