Before Congress established REITs (real estate investment trusts) in 1960, buying and selling commercial real estate largely was left to the realm of institutions and wealthy individuals with the resources to buy directly. Trusts organized as REITs opened up a new source of capital, with the fist REITs buying shopping centers and malls, followed by railroads and hotels. Over the years, REITs organized to finance apartments, warehouses, office buildings, and many other types of real estate. Tax reforms and other legislative modifications gave them more control over management and leasing as well as other investing flexibilities.

Now most REITs are organized as equity REITs that earn  income in the form of rents from commercial or multifamily properties. Their holdings can include many types of real estate such as healthcare and life science buildings, data centers, cell towers and even electric power lines or vacant land. Equity REITs can choose a mix of property types, specialize in specific sectors like healthcare, or limit their investments to specific cities or regions.

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There are also mortgage REITs (mReits) that originate or buy mortgages, or the mortgage-backed securities issued by agencies like Fannie Mae or Freddie Mac, and draw their revenue from the interest earned on the mortgage or loan payments. Mortgages provide a steady revenue stream, which makes an mREIT portfolio useful to generate passive income. Hybrid REITs combine both types of holdings, owning and operating real estate properties and owning commercial real estate mortgages.

All REITs can also be open-ended or closed-ended, a similarity they have with mutual funds.

A closed-end REIT is organized to raise capital for specific purchases and issues shares when it is organized, or if current shareholders approve issuing additional shares. An open-end REIT will keep issuing shares (often called “units”) as its portfolio grows with new investments.

3 Types of REITs, and Why the Difference Matters

The biggest distinction between types of REITs is whether they are sold by the organizers and their broker-dealers, or by listing on stock exchanges. A related characteristic is the depth of their financial disclosures. That makes for three basic types of REITs—private REITs; public non-listed REITs; and public listed REITs. Each type has its own characteristics:

Private Non-Traded REITs. Of the $3 trillion in REIT assets currently outstanding, the trade group NAREIT says $1 trillion in assets are privately held. Private REITs are not traded on public exchanges, which means unit pricing may lack full transparency. Share prices, property valuations and operational details will be available only when the sponsor provides them. While these non-traded REITs may be registered with the U.S. Securities and Exchange Commission (SEC), they are not required to make regular filings with the SEC. Investments are usually limited to institutional or accredited investors.

A non-traded REIT sets its own rules on how to buy or sell shares. The sponsor may or may not offer regular redemption of shares or reinvestment of distributions. The transfer or sale of shares to a third party may be prohibited or limited. Fees connected with purchases, sales and ongoing expenses vary widely, so make sure you read the offering documents closely to evaluate the fee and expense structure.

The documents should also indicate a private REIT’s exit strategy. Closed-end funds generally liquidate assets after a certain holding period and distribute the proceeds to their investors, while open-ended funds may have an infinite life. Either open-end or closed-end REITs may instead plan to go public and list on a national exchange.

Public Non-Traded REITs. A public REIT need not be publicly traded. Public non-listed REITs (PNLRs) file financial and operational results in the SEC’s EDGAR database. They are listed with the SEC, but not on a stock exchange. Instead, shares are bought and sold through the sponsor or an independent broker-dealer. A prospectus will be readily available when considering whether to buy, and quarterly financial statements during the holding period.

However, PNLRs likely will have similar liquidity issues as private REITs. The sponsor may not offer periodic redemption or dividend reinvestment. If the sponsor does offer redemption, it may be at a price less than the net asset value (NAV), or may include a percentage fee. Share transfers may be prohibited or limited. Typically, the sponsor will publish the NAV on a periodic basis. While pricing typically has been published quarterly, more recently we’ve seen some public non-traded REITs provide NAVs daily.

PNLRs may charge fees when you buy (front-end loads), when you sell (back-end loads) and on an ongoing basis (management fees). Historically front-end fees have been high, approaching 15% in some cases, to compensate the selling broker and the sponsor’s distribution arm. High upfront fees leave less money available to invest. It’s like spending $100 to buy an asset worth $85. As with private REITs, their exit strategies can vary widely too—from the liquidation of all assets and distribution of proceeds to acquisition by another REIT, continuing indefinitely or listing on a stock exchange.

Publicly Traded REITs. Shares of publicly traded REITs are registered with the SEC and are bought and sold through stockbrokers anytime the markets are open. All the financial reports required by the SEC are available, and often additional quarterly reports. After an initial public offering (IPO), prices are set by the market and bid-and-ask quotes can be viewed in real time. The cost to buy or sell shares of a listed REIT is the same as that of any other stock, which can be quite low for online discount brokers.

Because buyers and sellers set market prices, a listed REIT can cost more (at a premium) or less (at a discount) than the NAV of the underlying real estate assets. Most listed REITs expect to exist as going entities that plan on continuing forever. That doesn’t mean that things can’t change along the way—a publicly traded REIT could be acquired by another REIT, it could go private and no longer have shares listed, or in a rare circumstance could convert to a liquidating trust.

Publicly traded REITs can be grouped and structured in investment vehicles such as actively managed mutual funds or passively managed exchange-traded funds (REIT ETFs), which are modeled on a market index. REITs can also issue preferred shares, which are fixed income instruments, that trade on exchanges. The important thing to remember is that as long as shares are listed on a public exchange, you can buy or sell them on demand anytime the market is open.

All REITs are not created equal. Experience with a few real estate investment trusts won’t prepare the typical investor for their variations in pricing, liquidity or transparency. It’s crucial that all investors understand the differences between the three main categories of REITs to make the right REIT choices that complement their other holdings.