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Types of REITs

May 11, 2015

REITs can vary by two main factors:

1. What they invest in, and
2. How they're organizationally structured

Let’s look at these two factors and discuss the potential advantages of each.

What they invest in
REITs can invest either in properties/hard assets or they can invest in lending/debt. The first kind is known as an Equity REIT; the other is a Mortgage REIT.

Equity REITs offer investors the chance to participate in the commercial real estate market through the ownership of buildings. Equity REITs use investors’ money to buy buildings—such as office, industrial, retail, or hotels—and they lease the buildings to tenants. Rent paid by tenants serves as income for the REIT, and this income is paid out in the form of dividends to investors.

Equity REITs also can experience capital appreciation if the properties in their portfolios increase in market value. When the REIT sells the properties at some point in the future, any profits would increase investors’ returns.

Mortgage (or debt) REITs offer investors the chance to invest in real estate mortgages or mortgage-backed securities. They seek to earn income from the interest on these investments, as well as from the sales of mortgages to other buyers. Mortgage REITs have the same requirement as Equity REITs to distribute at least 90% of their income to their shareholders annually. They can invest in either residential or commercial mortgages.

How they’re structured
REITs fall in three basic categories in terms of how they’re organized: Publicly traded, public nontraded, and private.

Publicly traded REITs are listed on stock exchanges, and investors can buy and sell shares in them at any time. Publicly traded REITs must file with the Securities & Exchange Commission.

Public nontraded (or unlisted) REITs do not trade shares on public exchanges. Investors can purchase the shares from financial firms (broker dealers) that have selling agreements with the REIT. Investors can only sell their shares under certain circumstances. Public nontraded REITs must file with the Securities & Exchange Commission.

Private REITs do not trade shares on public exchanges. Investors can purchase the shares from financial firms (broker dealers) that have selling agreements with the REIT. Shares can be sold only under certain circumstances. Private REITs do NOT file with the Securities & Exchange Commission.

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