A real estate investment trust (REIT) is a unique type of company that owns, operates, or finances income-generating real estate. It allows investors to pool their money to invest in real estate assets. REIT pools the capital of numerous investors, which makes it possible for individual investors to earn dividends from real estate investments without buying, managing, or financing any properties themselves.

REITs invest in most real estate property types, including apartments, towers, medical facilities, retail centres, shopping malls, office buildings, and data warehouses.  Some REITs will buy these properties and lease them. Some develop properties from the ground up. Some focus on mortgages and financials.

How to tell REITs from other portfolio investments? Below are some criteria that help you differentiate.

• More than 75% of REITs income must be from rental incomes, mortgage payments, third-party management fees or other real estate derived sources.
• REITs must also be structured as corporations and have at least 100 stakeholders.
• No more than 50% of a REIT’s shares can be owned by <5 stakeholders. We can also understand this rule in another way, which is REITs limit the ownership of any single investor to 10%.
• Payout at least 90% of the taxable income.

REITs generate a steady income stream for investors but offer little in the way of capital appreciation. Most REITs are publicly traded like stocks, which makes them highly liquid.

We will talk more about the types, and pros and cons of REITs in our next blog.