REITs
Listed property companies required to distribute most taxable income.
Real estate exposure without buying a property directly
A REIT gives investors ownership exposure to a portfolio of real estate or real-estate-related assets through a corporate or trust structure.
That changes the practical experience of real-estate investing. Investors do not select tenants, negotiate leases or arrange property financing themselves. Management makes those decisions at the portfolio level.
Listed REITs can also trade every day even though the buildings they own cannot.
What drives the result
Property type, occupancy, rent growth, financing costs, leverage and the price investors are willing to pay for the REIT all matter.
A REIT can own good properties and still produce disappointing returns if debt becomes expensive or the shares were purchased at an excessive valuation. Conversely, a falling REIT price does not necessarily mean the underlying properties have experienced the same decline.
Common mistakes
- ×Valuing a REIT on net income instead of funds from operations
- ×Overlooking sensitivity to interest rates and refinancing terms
- ×Forgetting that most REIT dividends are taxed as ordinary income
- ×Assuming listed REITs behave like direct property ownership