A real estate investment trust is a company with the majority of its assets invested in real estate. As a financial security, a REIT operates much like a mutual fund; investors buy stocks and receive profit in the form of dividends. The shareholders then pay income tax on their profits. Since an REIT functions as a company, it is also managed by a board of directors or trustees. The company can’t be majority owned by five or fewer people, and it must be subject to taxation. Like other securities, REITs are publicly and privately traded. However, REITs perform better in the long-term than stocks and are fairly reliable. Investing in a REIT is a good way to profit from property without buying any real estate yourself.
There are three main types of real estate investment trusts: equity REITs, mortgage REITs, and hybrid REITs. Equity REITs generate profit from the rent of properties they own; their emphasis is on the equity (value) of their properties. Mortgage REITs invest primarily in mortgages, whether they’re buying mortgage-funded securities or lending mortgage money to people. These REITs make money off of mortgage interest. And as the name implies, hybrid REITs dabble in both equity and mortgage investments.
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