At the most basic level, a real estate investment trust is a company that owns, operates, or finances income-generating real estate.[1] They allow people to invest in a trust that then purchases a direct ownership stake in real estate properties. The investor then has exposure to the potential profits and income generated from the real estate investment activity of the trust, all without having to buy, manage or finance any of the properties themselves.[2] In layman’s terms, this means you can put your money toward owning a fraction of a pool of properties.
Historically, REITs became available as an investment option to the public in 1960.[3] Previously, this kind of investment option was only available to very wealthy investors, but now you can own fractions of REITs in the form of Exchange-Traded Funds that are bought and sold on the public market.[4]
The kinds of properties in a REIT can include:
- data centers
- apartment complexes
- hotels
- infrastructure
- healthcare facilities
- office buildings
- and many other income-generating properties[5]
Most REITs focus on a specific sector or kind of property.[6] There may be one REIT that focuses on apartments and another that focuses on renting office space. This is not true of every REIT, as some do have more diversified portfolios.[7]
Additionally, most REITs are what is called an “equity REIT.” This means that they generate money primarily through rent (not by buying and selling properties).[8] There are other forms of REITs, called “mortgage REITs,” that are more complicated. They make their money either by offering loans and mortgages directly or by acquiring mortgage-backed securities.[9] This allows them to generate money primarily through a net interest margin.[10] A net interest margin is the difference between the amount the company generates on interest and the amount they have to pay to fund their loans and mortgages.[11]
There are also “hybrid REITs” which use both equity and mortgage strategies to generate dividends for their stockholders.[12]
If you are looking for options for your investment portfolio, you may have come across REITs as an option. But are they right for you? If you are unsure how you should organize your finances, you may also want to consider a financial advisor. They can help you understand your own specific financial situation and guide you toward financial strategies that you might not have been aware of. If you are curious about what a financial advisor can do for you, feel free to reach out to us today for a complimentary review of your financial situation.