The term REIT is short for Real Estate Investment Trust—it’s pronounced “REET.” As an investor, you may have seen REITs offered as an option within your 401(k), or sometimes, financial advisors recommend REITs to their clients.
A REIT is very similar to a mutual fund. While a mutual fund may invest in a variety of individual companies, a REIT’s focus is exclusively on real estate holdings. It collects investment dollars from individual investors and uses the pooled funds to purchase large blocks of real estate.
History
REITs date back to 1960 when President Dwight Eisenhower signed legislation that allowed individual investors to invest their money into income-producing real estate. The REIT Act of 1960 paved the way for individual investors to have access to commercial real estate that was previously only accessible to the wealthiest of Americans.
What makes a REIT?
A REIT is basically a company formed to (1) use investors’ pooled funds and invest them in properties, and (2) qualify for certain tax advantages in the eyes of the IRS. To qualify as a REIT, the company must pay at least 90% of the money it makes back to the investors in the form of dividends.
Other important regulations include:
- At least 75% of assets must be real estate, cash, and government securities.
- At least 75% of gross income must come from rents, interest from mortgages, or other real estate investments.
- Shares in the REIT must be held by a minimum of 100 shareholders.
(Source: Morningstar)
Learn More—further reading
- A complete transcript of the original SEC act that created REITs
- Brad Thomas, “Eisenhower Paved the Way for REIT Investors to Enjoy Durable Dividends,” Forbes, December 2012.
