Real Estate Investment Trust: Types, Advantages, Disadvantages and FAQ

In this era, investment has become a trend, including the Real Estate Investment Trust (REIT). This model of investment is a reachable investment for those who are not wealthy enough. However, for some investors, this may not be so familiar that some of them are wondering what is REIT. Well, to understand what is a REIT you had better read this first.

What Are REITs

REITs were invented in the United States. If you are asking what does reit stand for, well, as what has been mentioned before, REITs stand for Real Estate Investment Trust.

It started when President Dwight D. Eisenhower signed the REIT Act title within the Cigar Excise Tax Extension in 1960. REITs were officially launched in order to give a chance to low-income people to invest in property.

REITs in America are not obligated to pay federal income tax as long as it meets the requirements of the Internal Revenue Code. At the beginning of 2005, there were around 200 REITs in America with total assets of 500 trillion dollars. After it, more than 30 countries in the world applied for REITs scheme.

Outside America, REITs are also developing in other countries. In Australia, REITs started to develop in 1971. In Asia, some countries started to adopt it, such as Thailand (2013), Taiwan (2005), South Korea (2002), Japan (2001), India (2014), Philippines (2009) and Singapore (2002).

In Australia, REITs were firstly adopted under the General Property Trust. It is under the Australian Stock Exchange/Australian Securities Exchange.

In India, REITs are adopted by the government and the Securities and Exchange Board of India. This adoption is hoped to make the market more liquid in a property purchase.

In Japan, REITs are included in government regulations. It is regulated under the Law Concerning Investment Trusts and Investments Companies (LITIC) and was established as an investment company under LITIC.

In Singapore, the REITs have many properties in many countries, including Japan, China, and Hongkong. Here, the regulation of REITs is under the Collective Investment Schemes, which is also under the Monetary Authority of Singapore’s Code on Collective Investment Schemes.

In Thailand, the Securities and Exchange Commission of Thailand made REITs an investment instrument in 2012. The REITs were then developed at the beginning of 2013.

In the Philippines, the regulation of REITs was approved by the Securities and Exchange Commission in May 2010. However, it failed to gain investors due to the tax regulation and the high cost.

In Hongkong, REITs already started in 2005. In July 2012, nine REITs were registered with a total capital of 15 billion dollars (almost 2 % of the total capital of the global REITs market).

Types of REITs

By its access, REITs are divided into two types. Publicly traded REITs and Public non-traded REITs.  Publicly traded REITs trade on major stock exchanges, e.g., Nasdaq Exchange and New York Exchange. This type of REIT should register with the US Securities and Exchange Commission (SEC). Besides, audited financial reports are also needed. To get a high return from these REITs, you should do some research first to find legit publicly traded REITs.

The second type, the public non-trade REITs, is open to all investors. However, it doesn’t trade on the stock exchanges. Those who want to invest here are able to purchase these REITs via a financial advisor or online portals. Online portals are sometimes recognized as real estate crowdfunding platforms. The same as publicly-traded REITs, this type of REIT also needs to register with SEC and also have audited financial reports.

Based on the asset type, REITs are usually divided into three types: mortgage, equity, and hybrid REITs. Most mortgage REITs lend money to real estate money directly, while equity REITs operate and own income-producing real estate. Hybrid REITs themselves invest in a combination of two previous types.

Based on the property types, REITs consist of many types. The first is office REITs. These REITs manage office real estate, such as office parks and skyscrapers. Usually, these types of REITs focus on a certain region or types of tenants.

The second, industrial REITs. This manages and owns industrial facilities such as cold storage, warehouses, distribution centers and light manufacturing. The same as office REITs, it is usually focused in certain regions and industrial property types.

The third is retail REITs. These REITs manage and own retail real estates such as shopping centers, free standing retail buildings or regional malls. Retail REITs usually focus on certain property types.

The fourth is hospitality REITs. It owns and manages resorts and hotels, which are usually managed by the brand of third-party hotels. It rents space to guests on a weekly or nightly basis.

The fifth, residential REITs. These REITs manage and own residential real estate such as apartments, manufactured home parks or single-family houses. These REITs usually focus on certain property types.

The sixth, timberland REITs. It manages and owns timberland that specializes in selling and harvesting timber. Some of these REITs sell portions of their real estate for another purpose, such as housing development. Besides, it also owns wood products manufacturing facilities sometimes.

The seventh, healthcare REITs. It manages and owns healthcare buildings such as hospitals, medical offices, or skilled nursing facilities. It leases the property to healthcare systems that operate the facilities.

The eighth, infrastructure REITs. It owns and manages properties related to infrastructures such as telecommunication towers, energy pipelines, and fiber cables.

The ninth, data center REITs manage and own data storage facilities. It leases space to technology companies and other businesses.

The tenth, diversified REITs.  It manages and owns commercial real estate’s diversified portfolio, such as industrial properties, office properties, and retail properties. Some of these REITs focus on certain markets, and other types are diversified by geography and property types/

The last specialty REITs. It manages and owns unique properties. Examples are farmland, movie theaters, or outdoor advertising.

Those types of REITs are important to be known so that you will know which REITs to invest in to get the best result.

How to Invest in REIT

For newbie investors, you need to understand first how do REITs work. Well, investing in REITs or how to buy REITs can be done in several ways. The easiest way to invest in REIT is by buying shares of publicly traded REITs via a brokerage account.  A diversified REIT can be purchased here. Investing in some different REITs is also possible in order to build a diversified portfolio.

Another way to how to invest in REITs can be done by buying an exchange-traded fund and mutual fund.

Are REITs a good investment?

REIT investment has its own advantages and disadvantages. The first advantage that it offers is the ease of getting passive income. Compared to the other stocks, REITs usually pay dividend yields above average.

The second. REITs don’t pay the income tax of federal corporations. It shields investors from double tax. Besides, it offers potential total returns such as dividend income and stock price appreciation.

The third, publicly traded REITs offer greater liquidity than owning real estate outright. In addition, public REITs are well-known to be transparent and offer lower cost than buying commercial real estate outright.

But, REITs also have disadvantages that may make you ask why not to invest in REITs. Some of the advantages include higher tax liabilities. It is also responsive to changes in interest rates. Some risks are also possible due to industry headwinds or technology disruption. Too much debt makes the risks even bigger, either.

At last, those advantages and disadvantages should be noticed by the investors so that they understand whether are REITs good investments or not.


What should a company do to qualify as a real estate investment trust?

A company should pay a minimum of 90% of its taxable income as dividends to shareholders every year. It should be managed by a board of directors either. Besides, it also should invest a minimum of 75 % of total assets and have no more than 50 % of its shares held by five or fewer people during the last half of the taxable year. Its shares should be fully transferable, and it should be an entity that will be taxable as a corporation.

What kind of properties that REITs manage and own? 

There are some kinds of properties that REITs manage and own, such as hotels, warehouses, office buildings, health care facilities, apartments, etc. However, most REITs prefer to specialize in one type of property only. Some REITs invest throughout the world, and some others invest in a certain area only.

Who is the investor of REITs?

All people of all ages are able to invest in REITs. This is the initial goal of the REITs, i.e., to give a chance to all people, including those who have low income.

What are the advantages of Public REITs?

The advantages of these REITs include some points such as liquidity, transparency, and scale. In terms of liquidity, an investor can easily sell their investment through some brokers, including low-cost online brokerage firms. In terms of transparency, public companies usually disclose a bit of information about their holdings and other aspects of the business. In terms of scale, better diversification is possible since most of the biggest REITs are public.

What are the disadvantages of Public REITs?

Public REITs shares don’t reflect underlying value necessarily. It reflects market values which are influenced by market sentiments and emotions. Besides, many public REITs carry a premium valuation that makes them rich in valuation.

What are the risks of REITs?

REITs have some risks that not all investors know about. The risks include some points as follows.

  1. Real Estate Risk

REITs are related to the real estate market. Thus, it also has risks related to fluctuations in property value and geographic demand.

  1. Occupancy Rate Risk

Maintaining certain occupancy levels must be done so that the expected payouts will be maintained. Lower occupancy rates may impact REITs negatively.

  1. Business Risk

REITs can also be affected by the underlying business or industry that leases the properties.

  1. Interest Rate Risk

Real estate is well known of its sensitivity to interest rate changes. This can affect the occupancy demand and property values.

Generally, in REITs investment you will always have the risk of money loss. Publicly traded REITs itself has a particular risk of losing value. It is because as the interest rate rises, the investment capital may be sent as bonds. So, it shares the same risk as the other investment models.

Are REITs safe in the recession?

In an economic recession, investing through certain types of REITs such as hotel is not recommended. To overcome this problem, investors can change the types of the REITs type such as on healthcare REITs since it is less cyclical and has longer lease structures.

Final Words

REITs were initially invented by American president, Dwight D. Eisenhower, in 1960. It was invented as an effort to make investment reachable for those people who come from the middle class with lower income. REITs investment was then developing into some countries such as Japan, India, Hongkong, Singapore, Thailand, Philippines, Thailand, and Australia.

As an investment, REITs offer some advantages and disadvantages. For the newbie investors, you need to understand more about this especially about the types and the way how it works. Overall, REITs offer the ease of earning passive income, however, it also has some risks as well as disadvantages. Some of the risks that may emerge are the risks related to the real estate market, occupancy rate, interest rate, and business.

The REITs investment also needs strategy because in some conditions (such as economic recession) certain types of REITs are not recommended to be taken. For instance, taking hotel REITs investment during the economic recession is not recommended. Another type of REITs such as hospitals will be a better choice to survive during the recession.

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