A real estate investment trust, or REIT, is a company that owns, operates or finances income-producing real estate under a qualifying legal structure. Buying a REIT security is different from buying a building directly: shareholders own a financial interest in the company, not a particular apartment or office.
REIT rules vary by jurisdiction. This introduction focuses on common US structures. The SEC’s REIT overview explains the basic investment forms and highlights liquidity and valuation risks.
Equity REITs and mortgage REITs are different businesses
An equity REIT generally holds properties and earns rental income. A mortgage REIT primarily finances real estate through mortgages or related securities. The same label therefore can describe very different exposure to tenants, interest rates, financing and credit. Nareit’s REIT types guide distinguishes these structures.
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| Type | Main business question | Examples of risk to inspect |
|---|---|---|
| Equity REIT | What cash can the property portfolio generate after its costs? | Occupancy, rent collection, tenant concentration, maintenance and refinancing |
| Mortgage REIT | How do financing costs, asset yields and credit outcomes interact? | Leverage, funding liquidity, prepayments, rate changes and credit losses |
Listed, non-traded and private structures
Exchange-listed shares can be traded in the market, though price and liquidity are not guaranteed. Public non-traded REITs do not provide the same exchange exit. Private offerings can have different disclosure and eligibility arrangements. Do not assume that a periodic statement value means you can sell immediately for that amount.
The SEC’s non-traded REIT bulletin highlights redemption limitations, fee issues and the importance of understanding distribution sources. Read the offering documents and exit terms before treating a REIT as readily available cash.
Why investors examine FFO alongside earnings
Property accounting includes depreciation and other items that can complicate simple comparisons of net income. Funds from operations, or FFO, is a supplemental industry measure. Nareit’s FFO definition explains adjustments related to real-estate depreciation and specified gains or losses. FFO is not the same thing as operating cash flow and does not replace the financial statements.
Adjusted FFO and similar cash-availability measures require reading the issuer’s calculation. Do not assume two companies make identical adjustments. Maintenance, recurring capital needs and other cash uses can matter even when they are not captured by a headline payout ratio.
A dividend-coverage example
Suppose a fictional REIT reports $100 million of FFO and distributes $80 million. The simple FFO payout ratio is 80%. If an investor’s separate analysis identifies $25 million of recurring cash needs not reflected in that measure, the remaining $75 million would not cover the $80 million distribution. This is a simplified research example, not a universal AFFO formula.
The lesson is to reconcile the metric with the actual business. A familiar acronym and a payout ratio below 100% do not, by themselves, prove the dividend is sustainable.
Why a higher yield can be a warning
If annual cash distributions are assumed to remain $2 per share, a $40 share price implies a 5% yield. At $25, the same assumed payment implies 8%. Nothing in that arithmetic says the properties became healthier; the stock price fell. The distribution may also change.
Total return combines distributions with changes in share value. Receiving cash does not make a price decline disappear, and taxes can affect what the investor retains. Compare yield with coverage, leverage and the cost of maintaining the assets.
A practical REIT research checklist
- Identify whether the business owns property or finances it.
- Read listing status, liquidity and redemption terms.
- Review tenant, property-type and geographic concentration.
- Inspect debt maturities and fixed-versus-floating financing.
- Reconcile FFO and adjusted metrics with net income and cash flow.
- Ask how distributions are funded and what recurring investment is required.
Our net debt guide helps frame financing questions. A broad diversification review should also include existing exposure through a home, employer or other funds.
FAQ: Are REITs a substitute for a savings account?
No. They can carry market, property, financing and liquidity risk. A distribution-focused investment is not automatically suitable for money needed at a specific near-term date.
Educational information, not personalized investment, accounting or tax advice. Examples are hypothetical. Investments can lose value, and neither income nor capital appreciation is guaranteed.