A REIT is a company that buys and sells real estate and rents it out. Its shares are traded on the stock exchange

What is a REIT

A real estate investment trust (REIT) is a company that owns income-producing real estate and, in many cases, also manages it.

A real estate investment trust can invest in a wide variety of properties, including street retail, offices, warehouses, shopping centers, hotels and apartments. Such funds are called equity funds: each investor gets a small share of the REIT’s assets by buying shares. To get REIT status, a company must have at least 75% of real estate in its asset structure, and receive at least 75% of its income from real estate.

And then there are mortgage funds, which are a type of REIT. They buy mortgage-backed securities, and their returns are generated by interest payments.

The fund can be private, and then the average investor cannot buy its shares. Also REITs can be placed on the stock exchange, here the investor is free to buy shares.

The advantages of a REIT fund in comparison with the classic purchase of real estate are obvious.

There is no high entry threshold. Instead of investing several million in one property, the investor can buy a share in a real estate package.

Lower Risks. When you buy shares of a real estate fund, you are buying a portion of the REIT’s entire portfolio of buildings or properties. One property could burn down, dramatically depreciate in value. With a large number of properties, the loss of one will not be fatal. And the real estate funds insure the real estate objects themselves, which is usually not the case when buying a single object.

Availability of expertise. Depending on experience and portfolio size, REITs have a certain set of knowledge and competencies. A private investor may not have enough expertise of his own to show such high quality results.

How the fund’s returns are generated

The bulk of a REIT’s income comes from rent payments or interest payments on mortgage bonds. Both types of income provide a steady cash flow.

Also, the returns of equity REITs are not affected by inflation. Rising inflation is not a barrier to rising yields, because typically real estate and rental payments also begin to rise over time.

The second source of income is rising real estate values. This story doesn’t provide a steady cash flow, as funds don’t sell their properties very often, locking in profits. But at times when the entire real estate market is rising, the share price can increase rapidly.

Another advantage of REITs is the fund’s federal tax exemption. This allows the fund to accumulate maximum profits from real estate management. At the same time, U.S. law requires that at least 90% of the income of a real estate fund be paid to its shareholders.

However, do not be enchanted by this level of profitability. Usually, the high rate is not associated with a rapid growth of cash flow, but with a decline in the value of shares.

Real estate fund shares can decline in two cases:

• A general downturn in the stock market. If there is a correction in the market, it usually does not bypass REITs.
• A real estate downturn. This can be affected by high mortgage rates and a general cooling of interest in real estate.