As we have discussed in the Introduction to REIT, REIT’s invest in Real Estate either directly or somewhat indirectly. There are three main types of REIT’s.
Equity REIT’s invest directly in Real Estate and own and manage the properties and therefore are responsible for the properties’ asset value. Their revenues come primarily from properties’ rent. Some Equity REITs specialize in a particular type of property such as apartments, official buildings or shopping malls. Other Equity REITs may focus on properties in a certain geographical area. Properties are usually purchased to be pat of a portfolio of investments rather than developed for resale. Equity REITs have the potential of being an excellent long-term investment, offering both dividend income as well as capital gains when properties are sold.
A mortgage REIT originates, buys and/or sells mortgages for real estate property owners. They make loans that are secured by real estate or purchase mortgage-backed securities or existing mortgages. This type of REIT is basically a finance company. Their revenues primarily come from the interest earned off their mortgages. There are approximately 40 mortgage REITS. About twenty five of them investing residential mortgages and the remainder invest in commercial mortgage securities. Mortgage REITs can be a good investment when interest rates drop.
Hybrids combine the investing principles of mortgage and equity REITs, diversifying between making mortgage loans and direct property ownership. They earn both rental and interest income. Hybrid REITs can offer a great deal of diversification all within one investment.
There are also REITs that are created for a specific development project for a certain number of years. The REIT is then liquidated when the time period is over and proceeds from the liquidation are distributed to the shareholders.
Another distinction made is whether a REIT is closed-ended or open-ended. A closed-end REIT only issues shares one time to the public and can only issue additional shares with the approval of the current shareholders. An open-ended REIT has the ability to issue new shares as well as redeem them at any time.
Finally REITs can be either private, non-exchange traded or publicly traded REITs. Private REITs are not traded on public exchanges and raise equity from trusts, individuals and other entities. These REITs must comply with federal securities laws but are subject to less regulation than public traded REITs. There are nearly 800 private U.S.-based REITs. Publicly traded REITs are registered with the Security Exchange Commission (SEC) and are publicly traded on the major stock exchanges like the New York Stock Exchange (NYSE) , American Stock Exchange (AMEX) and NASDAQ. There are about 200 publicly traded REITs. Because they are traded on the major exchanges, these are very liquid investments. There are also twenty or so non exchange traded REITs. They are SEC registered but they are not traded on public exchanges, but are privately sponsored.