Most REITs are public companies, and their shares are traded on a stock exchange, although there are some public REITs that are not traded on major exchanges. In addition, there is a third group, which includes private REIT funds.
Equity REITs and mortgage REITs, sometimes known as mREITs, are the two most common types of REITs.
Equity REITs make money by collecting rent and selling properties they hold long-term. Mortgage REITs (mREITs) invest in commercial and/or residential mortgages or mortgage-backed securities. In this blog, you will learn what constitutes a REIT and what types of REITs exist.
To qualify as a REIT under the US tax rules, a company must:
- Be structured as a corporation, trust, or association
- Be managed by a board of directors or trustees
- Invest at least 75% of total assets in real estate, cash, or US Treasuries
- Generate at least 75% of gross income from rentals, interest on mortgages that finance real estate, or real estate sales
- Pay at least 90% of taxable income as dividends to shareholders each year
- Have at least 100 shareholders after the first year of existence
- Have no more than 50% of its shares held by five or fewer individuals
Types of REITs:
Most REITs are equity REITs, meaning that they own and manage real estate that produces income. Income is generated primarily through rent (not through the resale of property).
Mortgage REITs lend money to property owners and operators either directly through mortgages and loans or indirectly through the acquisition of mortgage-backed securities. Their earnings are primarily generated by the net interest margin, i.e., the range between the interest they earn on mortgage loans and the cost of financing these loans. This model makes them potentially sensitive to rising interest rates.
Hybrid REITs use the investment strategies of both equity and mortgage REITs. Some real estate categories that REITs invest in include offices, apartment complexes, warehouses, retail centers, medical facilities, data centers, cell phone towers, infrastructure, and hotels. Most REITs specialize in one type of property, although some have a diverse portfolio of properties they manage.
REITs can be further categorized by the business sector:
Office REITs own and manage office properties and lease space from that real estate group to tenants. Those properties can range from skyscrapers to office parks.
Some office REITs focus on specific types of markets, such as central business districts or suburban areas. The focus of these REITs is on commercial buildings, offices, and business premises.
Industrial REITs own and operate industrial properties and lease space from that real estate group to tenants. Some industrial REITs focus on specific types of real estate, such as warehouses and distribution centers.
These REITs play an important role in e-commerce and help in fulfilling the fast delivery demand.
Retail REITs own and manage retail properties and lease space from that real estate group to tenants.
These REITs include REITs that focus on large regional shopping centers, retail centers, grocery shopping centers, and centers that have large retail chains as clients.
Lodging/resorts REITs own and operate hotels and resorts and rent space from that real estate group to guests.
Lodging/resorts REITs own different classes of hotels based on characteristics such as the level of hotel service and amenities. The properties of these REITs serve a wide range of clients, from business travelers to vacationers.
Residential REITs own and manage various forms of apartment buildings and rent space from that real estate group to tenants. Residential REITs include REITs that specialize in apartment buildings, student housing, workforce housing, and single-family homes. Within those market segments, some residential REITs also focus on specific geographic markets or property classes.
Healthcare REITs own and manage a variety of healthcare-related properties. Healthcare REITs’ property types include senior living facilities, hospitals, medical office buildings, and skilled nursing facilities.
Infrastructure REITs own and manage infrastructure real estate and collect rent from tenants who use that real estate.
Infrastructure REITs’ real estate and asset types include fiber optic cable facilities, wireless infrastructure, telecommunications towers, and energy pipelines.
Data Center REITs
These REITs own and operate facilities that clients use for secure data storage. Data center REITs offer a range of products and services to help keep servers and data secure, including uninterruptible power supply, air-cooled chillers, and physical security.
Diversified REITs own and manage a mix of property types and collect rent from tenants.
For example, diversified REITs may own portfolios consisting of office and industrial properties, making them ideal for investors looking to gain exposure to a variety of real estate assets.
Specialty REITs own and manage a unique mix of real estate and asset types.
Specialty REITs own properties that don’t fit into other REIT sectors. Examples of real estate owned by specialty REITs include movie theaters, casinos, agricultural land, and advertising space.
Serbian Build Fund LLC is a private fund that operates as a hybrid REIT, with a focus on commercial, industrial, and residential real estate.