A REIT, or Real Estate Investment Trust, is a company that owns income-producing real estate and distributes cash flow to shareholders, or it is a company that finances real estate and distributes interest income to shareholders — the former commonly being referred to as an “Equity REIT” and the latter as a “Mortgage REIT.” Both types of REITs do not pay corporate income tax, but are required to distribute virtually all of their income in dividends to shareholders, and those dividends are taxed at the ordinary income rate of the investor. This structure creates a tax efficient way for average investors to own a piece of large commercial and residential properties such as: apartment buildings, offices, shopping centers, and more.
The most commonly known REITs are traded on major stock exchanges (primarily the NYSE in the US), but there are also non-traded REITs, which do not list their shares on stock exchanges. The non-traded REIT structure has become more popular over the past decade as those companies will usually guide to a fixed percentage yield on the investment, and will aim to return all capital to shareholders in a fixed period of time.
To qualify as a REIT, a company must have at least 100 shareholders, invest 75% of it’s total assets in real estate, pay 90% of its taxable income in dividends, and be managed by a board of directors.