What is a Real Estate Investment Trust (REIT)?

  • A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate.
  • Similar to Mutual Funds REITs pool the capital of numerous investors.
  • This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.

How REIT works?

  • Most REITs operate along with a straightforward and easily understandable business model – By leasing space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends
  • REITs must payout at least 90 % of their taxable income to shareholders—and most payout 100%. In turn, shareholders pay the income taxes on those dividends.
  • The Properties in a REIT portfolio may include apartment complexes, data centres, healthcare facilities, hotels, infrastructure etc.
  • In general, REITs specialize in a specific real estate sector.
  • However, diversified and speciality REITs may hold different types of properties in their portfolios, such as a REIT that consists of both office and retail properties. 
  • Many REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session.
  • These REITs typically trade under substantial volume and are considered very liquid instruments. 

Types of REITs

Majorly there are three types of REITs they are:

1. Equity REITs:

  • These structures generate money when owners lend spaces such as large residential townships, office spaces, shopping malls to tenants on lease.
  • The generated income is then divided among investors through dividends.

2. Mortgage REITs:

  • Under this structure, there is no concept of an owner.
  • This arrangement means the finances taken against debt to develop real estate projects.
  • Typically, mortgage REITs generate income through EMIs that are further distributed among investors through dividends.
  • Hybrid REITs. These REITs use the investment strategies of both equity and mortgage REITs.

Advantages of REITs: 

Investors can benefit from investing in REIT in these ways:

1. Dividend income:

  • As dividend is nowadays considered as the greatest passive income source, investors can benefit as REIT provide substantial dividend income and steady capital growth for the long term.

2. Transparency:

  • As REITs are regulated by SEBI they are transparent.

3. Liquidity:

  • Most REITs trade on public stock exchanges and hence are easy to sell and buy, which makes them liquid assets.


1. No tax-benefits:

  • When it comes to tax-savings, REITs are not of much help.
  • For instance, the dividends earned from REIT companies are subjected to taxation.

2. Risks:

  • One of the major risks associated with REITs is that it is susceptible to market-linked fluctuations.
  • Investors should always invest as per their risk appetite

3. Low growth:

  • Capital appreciation is quite low in the case of REITs.
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