Congress created REIT, or “Real Estate Investment Trust," in 1960 as an investment tool. REITs must meet government regulations that are different from other financial securities traded on the stock market. Early REITs were small trusts, consisting of perhaps a group of investors owning an apartment building, but the law regulating them changed in 1993. The new law made these trusts attractive to institutional investors. The three types of REITs are equity, mortgage and hybrid.
Equity REITs buy stock in, own or manage commercial real estate, such as shopping centers, hospitals and office buildings. Each trust pays a minimum of 90 percent of its profits to investors as dividends. Equity REITs earn profits from tenant rent payments. This is the most common of the three trusts. Those that choose to trade on the stock market must meet the Securities and Exchange Commission requirement of filing quarterly and annual reports.
Mortgage REITs do not own or manage commercial real estate. They make available mortgages to real estate owners who wish to purchase commercial real estate, such as an investor wishing to purchase a mobile home park or a strip mall. Their revenue, of which at least 90 percent is paid as dividends, is generated from mortgage interest.
Hybrid REITs combine the qualities of the equity and mortgage REITs. That is, they own or manage some properties, while giving mortgages on other properties. As with the other two trust types, the IRS requires that REITs pay their investors at least 90 percent of the trust’s profit.
Stock Market Correlation
REITs that trade on the stock market are generally leveraged less than 50 percent. Other publicly traded corporations may be leveraged at several times their value, and this makes REITs an attractive investment. People who prefer income rather than growth stocks enjoy the high dividends that REITs traditionally pay. They are not generally affected by the day-to-day trading on the stock market, as most of these trusts' investments have fixed interest rates. However, when the real estate market declines and results in lower rates of occupancy, some REITs might become less attractive to potential stockholders, especially those in high-rent districts. A strong stock market indicates that construction companies have new projects, meaning good profits for the REITS that have purchased or loaned money on those properties.
- Legend Financial Advisors: REITS: An Excellent Portfolio Diversifier, But Should You Invest in Them?
- National Association of Real Estate Investment Trusts: Frequently Asked Questions About REITs
- U.S. Securities and Exchange Commission: Real Estate Investment Trusts
- Dow Jones Indexes: U.S. Select Real Estate Indexes