How does a REIT work?
An equity REIT typically pools money from various investors (unit-holders) to acquire commercial real estate and manages it. The rent collected from this real estate is the income generated by the REIT. This income, after accounting for operating and non operating expenses along with one offs is then distributed to the unit holders as a distribution (similar to dividend in the case of share holders). In the US, a REIT should annually distribute 90% of its taxable income to shareholders in the form of dividends to qualify as a REIT apart from other investment requirements. In other words, earning distributions from REITs is similar to earning rent on an owned property. To an investor, REITs offer the ability to diversify across various real estate sectors with smaller capital base unlike the case of fully owning a commercial real estate, which requires a large capital base. In a sector specific REIT, diversification could be seen in asset quality, geographical location and tenant base.
