In 1960, Congress established real estate investment trusts (REITs) as an amendment to the Cigar Excise Tax Extension. Because of this, investors were now able to buy shares in commercial real estate portfolios, which was previously only available to the wealthy and through large financial institutions.
To explain it in a few words, a REIT is a company that owns, operates, and finances real estate that generates income. In return, this company and its investors share some of the profits. They generate a steady income stream for investors that is highly liquid and can be traded like stocks but doesn’t offer a lot in the way of capital appreciation. Nearly any property type can be part of a REIT, from apartment buildings to cell towers to even hospitals. If the building makes some sort of income, chances are there is a REIT behind it.
Anyone can invest in commercial real estate with REITs, just like they would invest in stocks or other industries. It gives them another income stream without having to go out and buy or sell the real estate themselves- that’s all managed by the REIT itself. About 145 million Americans live in households that are invested in REITs through 401(k)’s, pension plans, and other investment funds.
REITs tend to specialize in specific property types, and these types are categorized into 13 different sectors. Collectively, REITs manage about $3.5 trillion in assets in the United States. Public REITs account for $2.5 trillion and represent more than 500,000 properties.
REITs make their money by leasing space and collecting on the rent. This income is then distributed to shareholders as dividends. REITs are legally required to pay out at least 90% of their income to shareholders, though most payout 100%. Shareholders then pay the income taxes on those dividends.
REITs also make suitable investments for your portfolio. They deliver competitive returns based on a high, steady dividend income. They also offer a comparatively low correlation with other assets, which makes them an excellent portfolio diversifier. They reduce overall portfolio risk and increase returns.