Introduction of Real Estate Investment Trusts (REITs)

Real Estate Investment Trust’s Definition

Real Estate Investment Trust (REIT) companies are companies that own or operate income-producing real estate. REITs generate a steady income for investors by giving them dividends from the investments. This means that an individual investor doesn’t have to buy, manage, or finance any properties themselves. Most REITs are publicly traded which makes them highly liquid, unlike the physical real estate investments. 

Establishment of REITs

REITs were established in 1960 by Congress as an amendment to the Cigar Excise Tax Extension. This allows investors to purchase shares in the commercial real estate portfolios. This facility was previously available only to wealthy investors and large-scale financial agents.

REITs invest mostly in real estate properties such as apartment buildings, commercial buildings, warehouses, medical facilities, etc. However, despite allowing a steady income, REITs offer very little capital appreciation. Properties in REIT’s portfolio may also include hotels, infrastructures, office buildings, etc.

Evolution of REITs

Around the time of their establishment in 1960, the first REITs consisted of mortgage companies. The industry experienced significant expansion in the late 1960s and the early 1970s. This expansion happened because of the increased use of Mortgage REITs or MREITs in affairs like land development and construction deals. In 1976, the Tax Reform Act about establishing REITS as corporations in addition to business trusts was authorized. The Act of 1986 also impacted REITs. New rules like preventing taxpayers from using partnerships and sheltering their earnings from other sources were established. Unfortunately, REITs witnessed significant losses in the stock market 3 years later.

In 1992, Retail REIT Taubman Centers modernized the REITs in 1992 by creating UPREIT. In a UPREIT the parties of an existing partnership and a REIT become partners in a new partnership known as the operating partnership. In short, The REIT is the general partner and the majority owner of the operating partnership units. As for the partners who contributed their properties, they have the right to exchange their operating partnerships for REIT shares. 

Types of REITs

There are basically 3 types of REITs

1. Equity REITs 
2. Mortgage REITs
3. Hybrid REITs

These REITs can be further classified into 3 types based on the shares that are bought. These are:

1. Publicly Traded REITs
2. Non-Traded REITs
3. Private REITs

Now that you have the basic understandings about what REITs are and how many types of REITs are available in the market, we will be discussing more about the types of REITs and how to invest in them in other articles.