What Is an eREIT and How Does It Work for Investors?

Real estate investment has traditionally required significant capital, making it inaccessible to many investors. However, technology-driven financial models have introduced new ways for individuals to participate in real estate markets with lower barriers to entry. One such innovation is the eREIT, a digital adaptation of traditional Real Estate Investment Trusts (REITs).

Unlike conventional REITs, which trade on stock exchanges, eREITs operate through online platforms, offering direct access to diversified real estate investments. This model often provides lower fees and easier access but comes with unique risks. Understanding how eREITs function helps investors determine whether they align with their financial goals.

eREIT Structure

Electronic Real Estate Investment Trusts are categorized based on the type of assets they invest in and how they generate returns. The three primary types are equity, mortgage, and hybrid eREITs, each with distinct characteristics.

Equity eREIT

Equity eREITs acquire and manage income-generating properties such as apartment complexes, office buildings, and retail spaces. Revenue comes from rental payments, which are distributed to investors after deducting expenses like maintenance and management fees. Performance depends on property appreciation, occupancy rates, and economic conditions.

Unlike direct real estate ownership, investors in equity eREITs do not handle property management. Instead, the eREIT’s team oversees leasing, property improvements, and tenant relations. However, these investments are subject to market fluctuations, and declining property values can impact returns. Investors should assess the eREIT’s portfolio composition, geographic focus, and historical performance to evaluate income stability and growth potential.

Mortgage eREIT

Mortgage eREITs do not own physical properties. Instead, they provide financing to real estate developers and property owners through loans or by purchasing mortgage-backed securities. Revenue comes from interest payments, making returns sensitive to interest rate movements and credit risk.

When interest rates rise, borrowing costs increase, potentially reducing demand for new loans. In a low-rate environment, mortgage eREITs may benefit from higher refinancing activity. Credit quality is also important—if borrowers default, it can impact returns. Investors should examine underwriting standards, loan diversification, and default rates before investing.

Hybrid eREIT

Hybrid eREITs combine elements of equity and mortgage eREITs, investing in both physical properties and real estate financing. This dual approach provides diversified revenue streams, balancing rental income with interest payments from loans.

By holding both property assets and mortgage investments, hybrid eREITs can mitigate risks associated with market downturns. If property values decline, mortgage income may provide stability. If lending conditions worsen, rental income can help sustain returns. Investors should evaluate how the fund allocates capital between property acquisitions and loans, as well as the management team’s strategy for adjusting holdings based on market conditions.

Public Filing and Compliance Requirements

eREITs must follow regulatory guidelines governing their formation, reporting, and investor disclosures. Unlike publicly traded REITs, which register with the Securities and Exchange Commission (SEC) and list on stock exchanges, many eREITs operate under exemptions such as Regulation A+ or Regulation D of the Securities Act of 1933. These exemptions allow them to raise capital while reducing regulatory burdens.

Regulation A+ permits eREITs to offer securities to both accredited and non-accredited investors, but they must file an offering circular with the SEC, including financial statements, risk factors, and investment strategy details. These filings require periodic updates to ensure transparency. Regulation D offerings, in contrast, are limited to accredited investors and have fewer disclosure obligations, though issuers must file Form D with the SEC and comply with anti-fraud provisions.

State regulations also impact eREIT compliance. While Regulation A+ preempts some state securities laws, certain states impose additional requirements on investor solicitation. eREITs must also comply with the Investment Company Act of 1940 if their structure falls within its scope, though many seek exemptions by ensuring their portfolios primarily consist of real estate assets rather than securities.

Financial reporting is a key compliance requirement. eREITs must provide investors with regular updates on asset performance, fund expenses, and portfolio composition. This typically includes annual audited financial statements, quarterly updates, and disclosures on material events. The level of detail varies based on the regulatory framework, but transparency is essential for maintaining investor confidence.

Distribution Methods

eREITs generate returns for investors primarily through periodic distributions, which may come from rental income, loan interest payments, or capital appreciation. Unlike traditional REITs that often pay dividends on a set schedule, eREITs may have more flexible distribution policies depending on the platform managing the fund. Some follow a fixed monthly or quarterly payout structure, while others adjust distributions based on cash flow availability.

Many eREITs allow investors to receive cash payouts directly into their bank accounts, providing liquidity without selling shares. Others offer dividend reinvestment plans (DRIPs), which automatically reinvest distributions to purchase additional shares, potentially enhancing long-term returns.

Tax treatment of distributions depends on their classification, which can include ordinary income, capital gains, or return of capital. Investors may receive tax reporting documents such as IRS Form 1099-DIV or Schedule K-1, depending on the eREIT’s structure. Understanding how distributions are categorized helps investors plan for tax liabilities.

Tax Considerations

Tax implications for eREIT investors depend on the investment structure, distribution type, and the investor’s tax bracket. Unlike traditional REITs, which often qualify for pass-through taxation under Internal Revenue Code (IRC) Section 856, many eREITs are structured as limited liability companies (LLCs) or partnerships, affecting how income is reported. Investors may receive IRS Schedule K-1 instead of Form 1099-DIV, requiring them to report partnership income, deductions, and potential passive losses on their personal tax returns.

The Tax Cuts and Jobs Act (TCJA) introduced a 20% qualified business income (QBI) deduction under IRC Section 199A, which may apply to certain eREIT distributions. Eligibility depends on factors such as total taxable income and the eREIT’s classification. High-earning individuals may face phaseouts, particularly if the eREIT’s income includes service-related activities or does not meet wage and qualified property threshold requirements.

Depreciation also affects tax efficiency. Some eREITs allocate depreciation deductions to offset taxable income, reducing investors’ immediate tax burden. Under the Modified Accelerated Cost Recovery System (MACRS), real estate assets can be depreciated over 27.5 years for residential properties and 39 years for commercial properties. Bonus depreciation and Section 179 deductions may provide additional tax benefits, though these depend on the eREIT’s accounting practices.

Redemption and Withdrawal Options

Liquidity is a key consideration for eREIT investors, as these investments do not trade on public exchanges like traditional REITs. Instead, redemption policies are set by the platform managing the eREIT and can vary significantly. Some eREITs offer periodic redemption windows, allowing investors to withdraw funds on a quarterly or annual basis, while others impose holding periods before withdrawals are permitted. These restrictions help maintain capital stability, as real estate investments are inherently long-term and illiquid.

Fees and penalties may apply to early redemptions, particularly if an investor exits before a specified holding period. Some platforms use a tiered fee structure, where withdrawal penalties decrease over time. For example, an eREIT may charge a 3% fee for redemptions within the first year, 2% in the second year, and no fee after three years. Additionally, redemption requests are often subject to fund availability—if too many investors seek withdrawals at once, the platform may limit or suspend redemptions. Investors should carefully review offering documents to understand liquidity terms and ensure the investment aligns with their time horizon.