What is a REIT?

Q. What is a real estate investment trust?

A REIT (pronounced "reet"), or real estate investment trust, is a type of company that owns or finances income-producing real estate assets.

The Lowdown

One way a REIT can generate earnings is by buying a wide selection of big real estate assets and charging rent to tenants on properties. Investors can buy units in publicly traded REITs, and receive profits generated by a REIT's holdings through taxable distributions. (More on that later.)

REITs use the pooled capital of many investors to buy and manage their properties. They can invest in a variety of income-producing properties, and can also finance properties, sell real estate or generate income from mortgages. Retail REITs typically focus on shopping malls, office REITs target commercial office property, residential REITs may focus investments on apartment buildings and manufactured housing, and healthcare REITs focus on hospitals and other medical facilities. Others specialize in hotels and even datacentres.

You can buy and sell units of publicly traded REITs in the same way you would buy and sell stocks or exchange-traded funds (ETFs).

How Distributions Work

Investors (or unitholders) in REITs get a portion of a REIT's income by way of a distribution, usually on a monthly or quarterly basis. As the Toronto Stock Exchangepoints out, REITs — which are classified as type of income trust — don't pay corporate tax and can pass on cash flows directly to unitholders. In Canada and the U.S., REITs are required to pay out the bulk of their taxable income to unitholders.

For investors, distributions are much like dividends, but are taxed differently. In short, dividends paid out by corporations qualify for government tax credits, which can reduce the overall amount of tax due. REIT distributions, meanwhile, generally consist of several types of return, like capital gains, foreign non-business income, return of capital and other income. Each portion — which REITs break out as part of their distribution information — is taxed at a different rate. Of note, REITs can be held in registered accounts, where the tax treatment wouldn't apply.

A Little History

REITs originated in the U.S. in the 1960s thanks to former President Dwight D. Eisenhower. Canada took a little longer. The first Canadian REIT was listed on the Toronto Stock Exchange in 1993.

How to Research REITs

Like finding other types of investments, screeners can be a useful place to start when researching REITs. A stock screener lets you choose from a number of criteria to identify investments of interest to you. REITs, for example, can be found by choosing the Industry category, followed by Real Estate Operations.