What Is a Real Estate Investment Trust (REIT)?
(2 of 7)
What Is a Real Estate Investment Trust (REIT)?
Real estate is a favorite among some investors. It provides many investment benefits and flexibility not found in other investments. There is one problem, though: it is not a small investment. For most folks, homeownership is the largest and only real estate investment they have. Yet many advisors suggest diversifying one’s portfolio with assets other than stocks and bonds—like real estate. A REIT might be a way to add that diversification.
Things To Know
- A real estate investment trust, or REIT (pronounced "reet"), is a company that owns, manages, and/or operates real estate in order to earn profits for shareholders.
What it is
A real estate investment trust, or REIT (pronounced "reet"), is a company that owns, manages, and/or operates real estate in order to earn profits for shareholders. There are about 1,100 REITs in the United States that have filed tax returns. The assets of all REITs registered with the Securities and Exchange Commission total over $1 trillion, according to the National Association of Real Estate Investment Trusts.
Congress opened the door to REITs in 1960 to enable small investors to participate in large commercial real estate ventures. Originally, REITs could own real estate but not manage or operate it, until the Tax Reform Act of 1986 expanded their powers. Since then, REITs have grown incrementally.
REITs vs. RELPs
Sometimes people compare REITs to real estate limited partnerships. While both entities invest in real estate, significant differences exist between the two. One is organized as a partnership, the other a corporation. One major difference is that a board of directors elected by the investors governs a REIT. A real estate limited partnership, in contrast, is managed by a general partner who sometimes cannot be easily removed by the limited partners.
Who invests in REITs and why?
Individuals and mutual funds are the largest investors in REITs. A wide variety of organizations such as pension funds, endowment funds, insurance companies, and bank trust departments also invest in them.
REITs offer a way to invest in real estate without actually having to buy properties yourself.