Types and Composition of Real Estate Investment Trust (REITs)

REIT (Real Estate Investment Trust) as mentioned in an earlier post Introduction to Real Estate Investment Trust (REIT): A derivative of Real Estate

Classification of REITs by Nature of REIT Investment

Equity REIT: The primary nature of the investment fund is to pool funds to purchase real estate properties. These are REITs grants investors ownership rights to the real estate properties purchased. As a result all income, proceeds and sale of such properties are distributed among investors.

Mortgage REIT: Mortgage REITs lend money to prospective real estate property owners. Their primary source of revenue come from the interest from the loans/mortgage backed securities. Investors here don't have any form of ownership in the property, the only benefit from the income stream emanating from the principal and interest repayments. The operation and management of these properties still falls in the hands of the would be hope owners.

Hybrid REIT: This REIT is a portfolio comprising of equity and mortgage REITs. They give you the combined benefits equity and mortgage REITs and naturally serve as a diversified investment.

Fig 1: Chart showing a comparison of returns between mortgage REIT and Equity REIT

Classification of REITs by Regulation and Visibility

Publicly Traded REITs: These REITs are listed on a public securities exchange. They are traded at a price and can the ownership of the REITs can easily exchange hands. The frequent selling and buying of these traded REITs induces fluctuates that allows investors to profit from capital appreciation and loss of its loss in value. Companies operating such REITs are are monitored by the Securities Exchange Commission (SEC) and thus follow all regulations required from the exchange for being listed in the exchange. Such as quarterly reports, audits etc. Such reports are utilized by investors to use to evaluate the REIT and forecast the future value of the REIT. A list of REITs listed stocks on Nasdaq can be found here The Complete List of REITs Stocks Trading on NASDAQ. If you are looking to examine the performance of the index look here.

Public Non-Traded REITs: Non-traded REITs are also regulated by SEC however they are not listed on a securities exchange. Because of its low visibility, the number of investors that buy and sell this REITs are few which reduces the liquidity(how easily they are sold) of the REIT, and reduces its fluctuation in price. An investor looking to trade this REITs should expect capital appreciation only from the liquidation(sale) of real estate properties owned by the REIT companies. It is recommended to do a careful review before trading this REITs.

Private REITs: Private REITs have no public visibility neither are the regulated by SEC. They just adhere to the requirements and guidelines needed to operate a REIT in a country. Not everyone can invest in this REIT. Any investor interested in this REIT will have to contact such companies before they can make investments.



Conclusion
The assortments and varieties offered by REITs allows for different rankings and ratings for risk. It allows investors to invest with a relatively low capital as compared to a conventional real estate Investments. As visibility reduces transparency reduces but that doesn't translate to more riskier investments per say. Whatever your preference might be always aim to invest in what you are comfortable with.