By Mike Heayn

Do you like the idea of owning real estate, but not actually doing any work aside from writing a check? If so investing in a REIT may be what you are looking for. A REIT —or real estate investment trust — is a type of company that is formed to exclusively invest in real estate. Most REITs invest in commercial properties. The company then sells shares, like a stock, to individual investors. REITs break down into three categories — equity, mortgage and hybrid. However, before you can understand the different types of REITs, it is important to know how they work.

A REIT is usually a public company, although they can be private, which focuses its investment strategy on real estate. Real estate or real estate-related investments, such as mortgages, are purchased through the REIT. Ownership is through shares, similar to other types of organizations. If public, the REIT may sell like other securities on stock exchanges. At least 90 percent of the REIT’s taxable income must be distributed to shareholders annually in the form of dividends in order for it to conform to specific laws. Revenue is usually derived directly from the real estate assets the REIT owns or has an interest in.

Normally, a REIT is not liquid. This means that if you want to sell your shares, you can only sell them back to the REIT company. Typically, they will buy shares back at a discount. You should be prepared to hold your shares in the REIT for the entire term, which can be anywhere from three to 15-plus years. In theory, you are investing in real estate since that is what the REIT invests in, but not dealing with the day-to-day logistics of purchasing or managing the properties. As far as tax benefits go, for a REIT, it is in the form of depreciation. REIT’s pass on the depreciation costs of their properties to shareholders as a tax write-off. In the end, only about 25-30 percent of the income distributions is non-taxable.

An equity REIT buys properties for cash and generates income from the rent they charge tenants. Simply put, an equity REIT will purchase properties such as office buildings and distribute the revenue that is made from the rents to shareholders in the form of dividends. Equity REITs can invest in all types of properties such as apartments, industrial properties, malls, large retailers and any combination.

A mortgage REIT will invest and or gain ownership of property mortgages. Direct lending of funds to property owners or investing in commercial mortgage-backed securities is what drives the revenue of a mortgage REIT. Unlike equity REITs, a mortgage REIT will generate income from the percentage they earn on the mortgages. Mortgage REITs typically have higher income levels. However, they don’t take advantage of the appreciation in the value of the properties like equity REITs do.

Hybrid REITs, per their name, take the best from both worlds. They invest in both properties and mortgage instruments. Revenue is derived from the properties income and from the mortgages in the REITs portfolio.

REITs are not fast moving investments and are often suited for investors who have a long-term investment strategy. Returns vary per REIT, but range anywhere from 4-7 percent + annually. The cost to enter a REIT can also be pricy, but if you pick the right REIT your money will usually perform consistently over the long term. For more specific information, consult a professional financial advisor about REIT options and investment strategies.

Mike Heayn is a Washington Mutual multi-family loan consultant. He can be reached at (310) 428-1342 or michael.heayn@wamu.net.