REIT (Real Estate Investment Trust)
A REIT is a company that owns, operates, or finances income-producing real estate and allows individual investors to earn dividends from real estate investments without having to buy or manage properties directly.
🎬 Video Explanation
Exam Tip
REIT = 90% income payout required. Dividends taxed as ORDINARY income. Publicly traded = liquid. Non-traded = illiquid.
What is a REIT?
A Real Estate Investment Trust (REIT) is a company that pools investor money to purchase and manage income-producing real estate or real estate-related assets. Publicly traded REITs trade on exchanges; public non-traded and private REITs also exist and can be illiquid.
How REITs Work
| Feature | Description |
|---|---|
| Structure | Company that owns/operates real estate |
| Income | Rental income from properties |
| Distribution | Must pay 90%+ of taxable income as dividends |
| Trading | Most trade on stock exchanges |
REIT Requirements (to qualify for tax benefits)
| Requirement | Minimum |
|---|---|
| Income from Real Estate | 75% of gross income |
| Assets in Real Estate | 75% of total assets |
| Dividend Payout | 90% of taxable income |
| Shareholders | 100+ after first year |
| Ownership Concentration | Generally no more than 50% in value owned by five or fewer individuals during the last half of the tax year, subject to applicable attribution rules |
Types of REITs
| Type | What They Own |
|---|---|
| Equity REITs | Own and operate properties (offices, apartments, malls) |
| Mortgage REITs (mREITs) | Invest in mortgages and mortgage-backed securities |
| Hybrid REITs | Combination of equity and mortgage |
REIT Sectors
| Sector | Examples |
|---|---|
| Residential | Apartments, single-family rentals |
| Retail | Shopping centers, malls |
| Office | Office buildings |
| Industrial | Warehouses, distribution centers |
| Healthcare | Hospitals, senior housing |
| Data Centers | Server facilities |
| Self-Storage | Storage unit facilities |
| Hotels | Hospitality properties |
REIT Benefits
| Benefit | Explanation |
|---|---|
| Diversification | Add real estate to portfolio without buying property |
| Liquidity | Trade on exchanges (unlike physical real estate) |
| Income | High dividend yields from 90% payout requirement |
| Professional Management | Experts manage properties |
| Low Minimums | Buy single share vs. entire property |
REIT Risks
| Risk | Description |
|---|---|
| Interest Rate Sensitivity | Rising rates can hurt REIT prices |
| Economic Cycles | Occupancy varies with economy |
| Sector Concentration | Some sectors underperform |
| Dividend Taxation | REIT dividends taxed as ordinary income |
Tax Treatment
| Income Type | Tax Rate |
|---|---|
| Ordinary Dividends | Ordinary income rates (not qualified) |
| Capital Gains | Capital gains rates |
| Return of Capital | Reduces cost basis (deferred) |
Publicly Traded vs. Non-Traded REITs
| Feature | Publicly Traded | Non-Traded |
|---|---|---|
| Liquidity | High (exchange traded) | Low (illiquid) |
| Transparency | SEC reporting | Public non-traded REITs also have SEC reporting; private REITs differ |
| Fees | Lower | Often higher |
| Valuation | Daily market price | Periodic appraisal |
Exam Alert
REITs must distribute 90% of taxable income as dividends. Most REIT dividends are taxed as ORDINARY INCOME (not qualified dividends). Publicly traded REITs offer liquidity; non-traded REITs are illiquid.
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Pre-licensing on ColibriRelated Terms
Dividend
A dividend is a distribution of a portion of a company's earnings to shareholders, typically paid quarterly in cash or additional shares.
Mutual Fund
A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities.
Exchange-Traded Fund (ETF)
An exchange-traded fund (ETF) is an investment fund that trades on stock exchanges like individual stocks, typically tracking an index while offering diversification, low costs, and tax efficiency.
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