A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate in a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a way for individual investors to earn a share of the income produced through commercial real estate ownership without actually having to buy or manage the property themselves.
Key Characteristics and Requirements of REITs:
- Income Production: The majority of a REIT’s earnings must come from real estate sources, such as rents from owned properties or interest from financed properties.
- Distribution of Income: To maintain its REIT status, a company must distribute at least 90% of its taxable income to shareholders annually in the form of dividends.
- Investment: At least 75% of a REIT’s assets must be invested in real estate, cash, or U.S. Treasuries.
- Diverse Shareholders: A REIT must have a minimum of 100 shareholders after its first year of existence.
- No Dominance by Five: No five individuals can own more than 50% of a REIT’s shares.
- Operational Structure: REITs must be managed by a board of directors or trustees, and they should be structured as corporations, trusts, or similar entities.
Within the real estate investment industry, REITs provide a way for investors to access the benefits of real estate investments without the need for direct property ownership. They also allow diversification since they often own multiple properties in different sectors of real estate, such as retail, office, residential, and more. They are considered liquid because they are traded on stock exchanges, unlike actual properties.
There are various types of REITs, including Equity REITs (which own and manage properties), Mortgage REITs (which finance real estate and earn interest from mortgages), and Hybrid REITs (which combine the strategies of equity and mortgage REITs).