Real Estate Investment Trusts (REITs): What They Are and Why They Matter

Real estate has long been considered one of the most stable and lucrative investment opportunities, but not everyone has the capital, time, or expertise to buy and manage properties directly. This is where Real Estate Investment Trusts (REITs) come in—a powerful way to invest in real estate without the hassle of property ownership.

Whether you're an experienced investor or just getting started, understanding how REITs work, their benefits and their historical performance can help you make informed financial decisions. In this guide, we’ll break down everything you need to know about REITs, including how they generate income, different types of REITs, and why they might be a smart addition to your investment portfolio.

What Is a REIT?

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs function similarly to mutual funds and exchange-traded funds (ETFs), pooling investor capital to purchase and manage real estate assets. This structure allows individuals to invest in large-scale real estate without having to buy, manage, or finance properties themselves.

How Do REITs Work?

1. Investors buy shares in a REIT.
2. The REIT uses that money to purchase or finance real estate.
3. The REIT generates income through rent, mortgage interest, or capital gains from selling properties.
4. REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
5. Shareholders receive a portion of the REIT's income, making REITs a popular passive investment vehicle.

Why Invest in REITs?

1. Passive Income

REITs generate income primarily through rent and mortgage interest. Since they are legally required to distribute most of their profits to shareholders, investors benefit from regular dividend payouts.

2. Portfolio Diversification

Investing in REITs allows you to diversify your portfolio with real estate assets, reducing risk compared to investing in a single property or market sector.

3. Liquidity

Unlike physical real estate, which can take months to sell, publicly traded REITs can be bought and sold like stocks on major exchanges. This makes them one of the most liquid ways to invest in real estate.

4. Accessibility for Small Investors

Traditional real estate investments often require large upfront capital. With REITs, even small investors can gain exposure to real estate markets with minimal investment.

5. Strong Long-Term Performance

Historically, REITs have provided competitive total returns, often outperforming the broader stock market and inflation over extended periods. They combine steady dividend income with long-term capital appreciation, making them an attractive option for investors seeking growth and income.

Types of REITs

Not all REITs are the same. They can be categorized based on how they invest and operate:

1. Equity REITs

• Own and manage income-generating properties.
• Generate revenue primarily through rental income.
• Most common type of REIT.

2. Mortgage REITs (mREITs)

• Do not own physical properties.
• Provide financing for real estate by purchasing mortgages and mortgage-backed securities.
• Earn income from interest payments.

3. Hybrid REITs

• Combine both equity and mortgage REIT strategies.
• Own properties while also investing in mortgages.

4. Publicly Traded REITs

• Listed on major stock exchanges and regulated by the SEC.
• Easy to buy and sell like stocks.

5. Public Non-Traded REITs

• Registered with the SEC but not traded on public exchanges.
• Less liquid than publicly traded REITs but can provide stable income.

6. Private REITs

• Not registered with the SEC or publicly traded.
• Available only to accredited investors.

What Types of Properties Do REITs Own?

REITs invest in a diverse range of properties, including:

• Office Buildings – Corporate headquarters and commercial office spaces.
• Apartment Complexes – Residential rental properties.
• Retail Centers – Shopping malls, strip malls, and standalone stores.
• Warehouses & Industrial – Logistics hubs and storage facilities.
• Medical Facilities – Hospitals, outpatient centers, and senior living communities.
• Data Centers – Facilities housing cloud computing and internet infrastructure.
• Hotels & Resorts – Hospitality and lodging businesses.
• Infrastructure – Cell towers, pipelines, and energy-related properties.
• Timberland – Forests used for lumber and paper production.

REITs typically specialize in one property sector, though some hold a mix of different real estate assets.

How Do REITs Make Money?

REITs operate using a straightforward business model:

1. Leasing Space & Collecting Rent – Equity REITs earn income by leasing properties to tenants.
2. Interest from Mortgages – Mortgage REITs earn income from mortgage interest.
3. Capital Gains – REITs may buy and sell properties, profiting from price appreciation.
4. Dividends to Shareholders – At least 90% of a REIT’s taxable income must be distributed to shareholders.

Since REITs focus on income generation, they offer more predictable cash flow compared to many other investments.

REIT Performance Over Time

Historically, REITs have delivered strong returns, often outperforming stocks, bonds, and inflation. Over the past 20 years, REITs have outperformed the S&P 500 Index, offering investors steady dividends and long-term capital appreciation.

Factors contributing to REIT success include:
✔️ Rising property values over time.
✔️ Consistent demand for rental spaces.
✔️ Economic growth driving real estate expansion.

Of course, like any investment, REITs can be affected by market conditions, interest rates, and economic downturns. However, their strong dividend payouts and diversified assets make them a popular choice for long-term investors.

How to Invest in REITs

Investing in REITs is easy and accessible:

• Publicly Traded REITs – Buy shares on major stock exchanges, just like stocks.
• REIT Mutual Funds & ETFs – Invest in a diversified portfolio of REITs through funds.
• Public Non-Traded REITs – Invest through brokers, though these are less liquid.
• Private REITs – Available only to accredited investors.

A financial advisor or investment professional can help determine which REITs align with your investment goals.

How Does a Company Qualify as a REIT?

To qualify as a REIT, a company must:

✅ Invest at least 75% of its assets in real estate.
✅ Derive at least 75% of its income from rent, mortgage interest, or property sales.
✅ Pay at least 90% of its taxable income to shareholders as dividends.
✅ Be taxable as a corporation.
✅ Be managed by a board of directors or trustees.
✅ Have at least 100 shareholders.
✅ No more than 50% of its shares can be held by five or fewer individuals.

Final Thoughts: Should You Invest in REITs?

REITs offer a unique way to invest in real estate without the challenges of direct ownership. With steady dividend income, strong long-term returns, and portfolio diversification, they are an excellent choice for investors seeking passive income and capital appreciation.

However, like any investment, REITs come with risks, including market fluctuations and interest rate sensitivity. Carefully research individual REITs and consider diversifying across different property sectors.

Are REITs the right investment for you? If you're looking for real estate exposure with liquidity and passive income, they might just be the perfect addition to your portfolio!

Ruben Sanchez

REALTOR® | Team Lead

(714) 656-6325

ruben@trxg.net

DRE 02091617

ΓEA⅃ Brokerage