INSIGHT

What is a REIT? Understanding Real Estate Investment Trusts

Tara Wilson • June 2, 2025

Industries: Real Estate Investment Trusts (REITs)

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Real Estate Investment Trusts (REITs) are a way to invest in real estate without directly purchasing, managing, or financing properties. These investment vehicles open doors to real estate markets that might otherwise be inaccessible to average investors, combining the potential for both income and growth in a regulated structure. 

With the $4 trillion U.S. REIT industry now reaching more than 170 million Americans through retirement accounts and investment funds, these specialized investment vehicles have become an essential component of many diversified portfolios. What began as a way to democratize real estate investment has evolved into a sophisticated market driving innovation across the built environment—from sustainable building technologies to digital transformation. 

How REITs work 

REITs operate under a specific set of rules that differentiate them from other investment vehicles. To qualify as a REIT, a company must meet several requirements established by Congress. 

Structure and legal requirements 

To qualify as a REIT, a company must: 

• Be structured as a corporation, trust, or association. 
• Have at least 100 shareholders (widely held). 
• Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries. 
• 75% income test: At least 75% of gross income must come from real estate-related sources (rents, mortgage interest, gains from real estate sales, etc.).  
• 95% income test: At least 95% of gross income must come from qualifying sources, which include all sources that satisfy the 75% test plus dividends, interest, and gains from sales of stocks or securities. 
• Pay at least 90% of taxable income to shareholders as dividends each year. 
• Be managed by a board of directors or trustees. 

These requirements help ensure REITs remain focused on real estate investment and maintain their primary function: providing returns to shareholders through income generated from their property portfolios. 

Tax advantages and dividend requirements 

One of the most significant benefits of the REIT structure is its special tax status. Unlike typical corporations that pay taxes on their profits before distributing dividends, qualified REITs can deduct dividend payments to shareholders from their corporate taxable income. This effectively eliminates corporate-level taxation for REITs that distribute all their taxable income. 

In exchange for this tax advantage, REITs must distribute at least 90% of their taxable income to shareholders annually. This requirement creates a reliable income stream for investors but also means REITs retain less capital for growth compared to traditional corporations. 

Types of REITs in today’s market 

The REIT universe has expanded well beyond its traditional boundaries, offering investors access to diverse property types and investment strategies. Understanding these different REIT categories can help investors identify opportunities that align with their investment goals. 

Traditional sectors 

Many REITs focus on established property types that form the backbone of the real estate market: 

• Residential REITs: Invest in apartment buildings, single-family rentals, and manufactured housing communities. Major players include AvalonBay Communities and Equity Residential. 
• Retail REITs: Own shopping centers, malls, and freestanding retail properties. Simon Property Group and Kimco Realty are prominent examples. 
• Office REITs: Focus on office buildings in urban and suburban locations. Boston Properties and Alexandria Real Estate Equities are leading office REITs. 
• Industrial REITs: Invest in warehouse and distribution facilities, which have gained prominence with the rise of e-commerce. Prologis and Duke Realty are examples in this sector. 

Emerging segments 

As technology and society evolve, REITs have expanded into specialized property types that reflect changing economic priorities: 

• Data center REITs: Own facilities that house servers and networking equipment essential for cloud computing and digital services. Examples include Equinix and Digital Realty Trust. 
• Cell tower REITs: Invest in communications infrastructure that supports mobile networks. American Tower and Crown Castle are major players. 
• Healthcare REITs: Own medical facilities including hospitals, medical offices, and senior living communities. Welltower and Healthpeak Properties are prominent in this sector. 
• Gaming REITs: Specialize in casino properties, separating real estate ownership from operational management. VICI Properties and Gaming and Leisure Properties are examples. 

Investment structure options 

REITs can also be categorized by their investment structure: 

• Equity REITs: Own and operate income-producing real estate, deriving revenue primarily from property rents. 
• Mortgage REITs: Provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities. 
• Hybrid REITs: Combine strategies of both equity and mortgage REITs. 
• Publicly traded REITs: Listed on major stock exchanges with shares bought and sold like stocks, offering high liquidity. 
• Public non-traded REITs: Registered with the SEC but not listed on exchanges, typically with limited liquidity. 
• Private REITs: Not registered with the SEC and only available to institutional or accredited investors. 

Benefits of investing in REITs 

REITs offer several distinct advantages that have contributed to their growing popularity among both individual and institutional investors. 

• Portfolio diversification: REITs provide access to real estate, an asset class that historically has shown low correlation with stocks and bonds. By adding REITs to a traditional portfolio of stocks and bonds, investors can potentially reduce portfolio volatility while maintaining or improving overall returns.  
• Income generation through dividends: The requirement that REITs distribute at least 90% of taxable income creates a reliable income stream for investors. These dividends can provide steady cash flow for retirement income or be reinvested to compound returns over time.  
• Liquidity and accessibility: Unlike direct real estate investments, publicly traded REITs offer daily liquidity through major stock exchanges. This liquidity allows investors to adjust their real estate exposure without the transaction costs and time delays. 

Key considerations for REIT investments 

While REITs offer numerous benefits, investors should understand several important factors that can affect REIT performance before adding them to their portfolios. 

• Interest rate sensitivity: REITs are sensitive to interest rate changes for two reasons: higher rates make bonds more competitive with REITs for income-seeking investors, and REITs rely on debt financing, so rising rates increase their borrowing costs and reduce profitability. 
• Property-specific risks: Each REIT sector faces unique challenges – retail deals with e-commerce, office with remote work, healthcare with policy changes, and residential with employment trends. Understanding these sector-specific risks is crucial for REIT investment decisions. 
• ESG factors and sustainable growth: Many REITs now incorporate sustainable building technologies and energy efficiency improvements that can affect both operating costs and property values. Investors should review a REIT’s ESG initiatives and green certifications, as these factors can influence long-term returns and risk profiles. 

How BPM supports REIT success 

REITs face complex regulatory and operational challenges that require specialized experience. BPM, a leading accounting and advisory firm, provides comprehensive support tailored to the REIT industry’s unique needs. 

• Strategic Growth BPM helps REITs navigate acquisitions, digital transformation, ESG initiatives, and performance optimization to support data-driven growth decisions. 
• Tax Compliance Maintaining REIT status requires strict adherence to qualification tests and distribution requirements. BPM provides REIT qualification testing, tax compliance, TRS structuring, and international tax services to preserve tax-advantaged status. 
• Operational Excellence BPM offers data analytics, cost segregation studies, ERP implementation, and outsourced accounting services to maximize operational efficiency and maintain strong financial controls.  

Looking to optimize your REIT strategy or need help to ensure compliance with evolving regulations? Contact BPM to explore tailored solutions for your real estate investment trust.