Which Type of REIT Involves Residential & Commercial Property?

Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate. These entities allow individuals to invest in large-scale real estate portfolios without the complexities of direct property ownership. REITs offer access to assets like office buildings, shopping malls, or apartment complexes, making real estate investing accessible, similar to how one might invest in other industries through stocks or mutual funds.

Understanding Real Estate Investment Trusts

REITs are publicly traded companies, functioning much like stocks, with shares bought and sold on major stock exchanges. To maintain their tax-advantaged status, REITs must distribute at least 90% of their taxable income as dividends to shareholders annually.

This requirement stems from their unique tax structure, which allows them to operate as pass-through entities. Unlike most corporations, REITs generally avoid corporate income tax at the company level, provided they meet the distribution requirements. This means income is taxed only once, at the shareholder level, often as ordinary income. REITs offer benefits such as liquidity, as shares can be easily traded, and professional management of real estate assets, removing the burden of direct property management from individual investors.

Categorizing Real Estate Investment Trusts by Property Focus

REITs are categorized by the types of properties they hold within their portfolios. Residential REITs, for example, specialize in properties where people live, such as apartment buildings, manufactured housing communities, student housing, and single-family rental homes. Commercial REITs focus on properties used for business purposes. This broad category includes retail centers, office buildings, industrial facilities like warehouses and distribution centers, healthcare properties such as hospitals and nursing homes, data centers, and hotels.

Beyond these distinctions, specialized REITs concentrate on niche property types like timberland or infrastructure assets such as cell towers and energy pipelines. Many REITs focus on a single property sector to develop expertise. However, the specific type of REIT that involves a mix of both residential and commercial property is known as a Diversified Real Estate Investment Trust. These REITs spread their investments across multiple property types, offering broader exposure to the real estate market.

Diversified Real Estate Investment Trusts

Diversified Real Estate Investment Trusts own and manage a portfolio that includes various property types, encompassing both residential and a range of commercial sectors. Their holdings might include multifamily apartment buildings alongside retail spaces, office complexes, or industrial warehouses. This diversified approach spreads risk across different market segments.

By not concentrating investments in a single property type, diversified REITs aim to mitigate the impact of downturns in any one sector. For example, if the office market experiences a decline, the residential or industrial components of the portfolio may help stabilize overall returns. Their portfolio structure is designed to include a specific mix of properties tailored to an investment strategy. This broad exposure allows investors to gain access to a variety of real estate assets, potentially reducing the overall volatility of their investment portfolio.