What is a Real Estate Investment Trust (REIT)?

//What is a Real Estate Investment Trust (REIT)?
What is a Real Estate Investment Trust (REIT)? 2017-10-10T02:29:16+00:00

Definition: A real estate investment trust (REIT) is a legal entity made up of outside investors and their funds designed to finance and operate real estate ventures that produce earnings for the investors.

What Does REIT Mean?

What is the definition of real estate investment trust? Similar to mutual funds, many investors pool their funds into a single piece of land property (schools, apartments, office parks, etc.) with the intention of increasing their returns as the property value increases. This structure allows each investor to be part of a larger investment that they wouldn’t have been able to afford on their own.

The reason these are often compared to mutual funds is because Dwight D. Eisenhower created the REIT Title with the intention of mirroring the structure of mutual funds in order to stimulate the real estate industry. They are now widely used all over the world because they benefit the expansion of real estate while also providing returns to investors as rent is collected from those using the property.

Although they pay out dividends, the major draw is that they provide moderate risk/ modern return rates over time. There are all types of REITs based on the type of building or land area being invested in, like retail (shopping malls and plazas) or residential (townhomes, apartments, and houses).

Let’s take a look at an example.

Example

A common example of a REIT investment would start with the real estate owner, say a company that owns a new development of luxury apartments. The apartments are being built in a growing city with a highly educated population and large buying power. This is a great setup for a successful REIT.

Over time, the city will continue to grow and young business people will move in and out of the building, providing a large return on investment from their rental fees. Those who have invested in the apartment building will now receive incremental dividends and over time, their investment will increase in value. Ten years later the city has grown, the apartment building is in great shape due to ample investment, and the local economy is booming.

Summary Definition

Define REIT: Real estate investment trust means a legal entity used to operate properties that produce revenues.