What Is a REIT? Real Estate Investment Trusts, Explained

So you want to make big money by investing in real estate. You’re not alone! But for a newbie, this world may seem confusing. One easy way to get started is with a real estate investment trust, or REIT (pronounced “reet”). So what exactly is a REIT?

A REIT is a way to increase the amount of real estate in your financial portfolio without requiring you to actually buy a piece of property.

REITs were created by Congress in 1960 so that investors without the millions of dollars required to invest in commercial property could invest in real estate. Many REITs are publicly traded on stock exchanges and own a variety of property such as shopping malls, shopping centers, offices, hotels, apartments, self-storage facilities, industrial warehouses, and health care facilities such as medical offices and assisted-living facilities.

Most REITs manage their property as well as own it. Some REITs don’t own property at all and invest instead in mortgages. Other REITs are not publicly traded. Individual investors can buy REIT shares instead of entering into a real estate partnership.

Like any other investment, the performance of individual REITs fluctuates for a variety of reasons. The best resource for information about REITs is the National Association of Real Estate Investment Trusts, which has extensive research and data on REITs. According to NAREIT, the average annual return on equity REITs between January 1978 and December 2010 was nearly 12.3%.

During the Great Recession, REITs often performed stronger than other investments because many of them had less debt than private real estate investors prior to the downturn, and some also sold property at the height of the real estate boom. The greater financial strength of REITs allowed many of them the ability to purchase discounted property from distressed private investors during the recession.

How to invest in REITs

Most REITs invest in a particular property type and diversify by owning property in a variety of markets in the United States and sometimes overseas.

Among the publicly traded REITs, the following property sectors are represented:

• Retail: 26%

• Residential: 13%

• Office: 12%

• Health care facilities: 11%

• Lodging and resorts: 7%

• Self-storage: 6%

• Timber: 5%

Over the past two decades, according to NAREIT, many REIT property sectors have earned double-digit returns:

• Self-storage: 16%

• Health care: 12%

• Office: 11%

• Retail: 11%

• Residential 11%

Future performance of individual REITs depends on a variety of factors, including the economy and the internal management of each REIT. Different property sectors are affected in different ways by macroeconomics.

For example, the retail sector tends to be affected by consumer confidence and employment, but REIT shopping center owners have taken steps to adjust their property model to offset sluggish retail spending, such as adding more restaurants and drawing people to shopping centers and malls for the experience rather than individual stores. Individual REITs within each property sector often focus their investments in a particular geographical area or property type, such as medical offices or high-end luxury hotels.

While REIT investments require less time and energy than buying property on an individual basis, you still need to do your due diligence and research any fund before you choose to invest.

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