REIT Basics
What are REITs?
Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Unlike other real estate companies, a REIT does not develop real estate properties to resell them. Instead, a REIT buys and develops properties primarily to operate them as part of its own investment portfolio.
Why would somebody invest in REITs?
REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.
What types of REITs are there?
Many REITs are registered with the SEC and are publicly traded on a stock exchange. These are known as publicly traded REITs. Others may be registered with the SEC but are not publicly traded. These are known as non- traded REITs (also known as non-exchange traded REITs). This is one of the most important distinctions among the various kinds of REITs. Before investing in a REIT, you should understand whether or not it is publicly traded, and how this could affect the benefits and risks to you.
What are the benefits and risks of REITs?
REITs offer a way to include real estate in one’s investment portfolio. Additionally, some REITs may offer higher dividend yields than some other investments.
But there are some risks, especially with non-exchange traded REITs. Because they do not trade on a stock exchange, non-traded REITs involve special risks such as Lack of Liquidity, Share Value Transparency, Conflicts of Interest, and Distributions May Be Paid from Offering Proceeds and Borrowings.
How to buy and sell REITs
You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a broker. You can purchase shares of a non-traded REIT through a broker that participates in the non-traded REIT’s offering. You can also purchase shares in a REIT mutual fund or REIT exchange-traded fund.
Avoiding fraud
Be wary of any person who attempts to sell REITs that are not registered with the SEC.
You can verify the registration of both publicly traded and non-traded REITs through the SEC’s EDGAR system. You can also use EDGAR to review a REIT’s annual and quarterly reports as well as any offering prospectus. For more on how to use EDGAR, please visit Research Public Companies.
You should also check out the broker or investment adviser who recommends purchasing a REIT. To learn how to do so, please visit Working with Brokers and Investment Advisers.
The Apartment Building Analogy
Imagine you are standing on a busy downtown corner, looking up at a massive, gleaming apartment building. It’s thriving, full of tenants, and worth $100 million. You know that owning a building like that is a life-changing wealth-builder—but buying it alone is impossible.
This is where a Public REIT changes the rules. It takes that $100 million building and opens it up for shared ownership. You buy a piece of it. Whether you buy $500 or $50,000, you are now a legal part-owner of that building.
Every month, when those tenants pay their rent, a portion of that money belongs to you. You own as much or as little as you want, and you never have to fix a single pipe or repair a broken door knob. That is the power of a REIT.