A real estate investment trust, or REIT, is a business structure that makes money by owning or financing property. First legally created in the U.S. through the Real Estate Investment Trust Act of 1960, REITs are designed to offer commercial real estate investment benefits to all investors – benefits that were only available to wealthy individuals through large financial entities before.

Most REITs accomplish this by buying up or building up real estate in the form of apartments, office buildings, casinos, hotels, shopping centers, cell towers, warehouses, and the like, then renting those properties out like any other landlord would. (Other REITs, known as mortgage REITs, or mREITs, loan money to such business operations.) These landlords then offer shares of their companies to willing investors, who benefit from any resulting gains in stock price.

But that’s not all. In fact, that’s not even the most important reason why investors like REITs. The way they’re set up, these corporate landlords don’t pay corporate income tax. In return, they’re legally required to pay out at least 90% of their otherwise taxable income to shareholders in the form of dividends.

Investors are taxed on those dividends and any realized capital gains, it’s true. (Uncle Sam always – and I do mean always – gets his cut somehow, someway.) But even so, REITs offer impressive opportunities to build and sustain wealth. They’re so impressive, in fact, that U.S. REITs have inspired dozens of other countries around the world to start similar programs.

Tempting Real Estate Investment Trust Traits

REITs are most well-known – and sought after – for their meaningful dividends since they must pay out at least 90% of what would be their taxable income (if they paid taxes on their income. Which they don’t). But there are other requirements on the books as well.

According to the U.S. Securities and Exchange Commission (SEC), a REIT must also:

• Invest at least 75% of its total assets in real estate
• Derive at least 75% of its gross income from real-property rental fees, interest on mortgages financing real property, and/or sales of real estate
• Be taxable as a corporation
• Be managed by a board of directors or trustees
• Have no less than 100 shareholders by the end of its first year
• Have no more than 50% of its shares held by five or fewer individuals

These rules apply to all REITs, no matter which of the following categories they fall into.

REIT Categories

There are several different categories that a real estate investment trust can fall into, many of which are interchangeable. And then there are the individual economic sectors they operate under, from office to lodging to timber to data center… just to name a few. But for now, let’s explore the larger context these companies operate in…

Equity REITs vs. Mortgage REITs

The two main types are equity REITs and mortgage REITs, or mREITs.

Equity REITs own or operate income-producing real estate – such as shopping centers, medical facilities, and apartment buildings – and lease the space to tenants. That’s how they make the bulk of their money, though they can also generate income by selling properties and issuing new shares.

Mortgage REITs, meanwhile, provide financing for income-producing real estate. They purchase or initiate mortgages and mortgage-backed securities (MBS), then earn income from the interest. Typically, an mREIT will focus on either the residential or commercial mortgage markets, although some invest in both RMBS and CMBS.

Similarly, REITs can own both rent-producing properties and interest-earning mortgages, or mortgage-backed securities (MBS). These hybrid REITs aren’t very common, and those that do exist tend to vastly favor one approach or the other.

Public vs Private REITs

Publicly Traded REITs

Publicly traded REITs are listed on national stock exchanges such as the Nasdaq or New York Stock Exchange. They therefore tend to offer reasonably to extremely liquid shares, which is why millions of individual investors hold them in their personal portfolios.

In the U.S., they must also register with the SEC and file appropriate quarterly and yearly reports that disclose required information and timely updates about business dealings as they happen. These should be available on each publicly traded REIT’s website as well as on the SEC’s EDGAR database.

Private REITs 

A REIT does not necessarily have to register with the SEC. There are private REITs – equity, mortgage, and hybrid – that offer shares apart from national stock exchanges. While they still must follow the IRS mandates of paying out 90% of their otherwise taxable income to shareholders, being run by a board, etc., they are not subject to the same disclosure requirements as their non-private counterparts.

Public Non-Listed REITs

Public non-listed REITs (PNLRs) are registered with the SEC but don’t trade on national stock exchanges. Like “regular” REITs, they must make regular SEC disclosures, including quarterly and yearly financial reports. But while you can purchase shares of publicly traded REITs through most brokers and financial advisers, the pool of professionals who can help you participate in PNLRs is much smaller. So you’ll have to do more research to get involved and be prepared to invest a minimum amount, usually between $1,000 and $2,500.