Understanding Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are companies that own, operate, or finance real estate such as office buildings, apartments, shopping centers, and more.
Most REITs are publicly traded and offer investors the potential to earn dividends from real estate without having to purchase individual properties, as well as the potential for capital appreciation of stocks.(1)
Three Main Types of REITs: Equity, Mortgage, and Hybrid
The three main types of REITS include:
Equity REITs
Equity REITs generally own and operate real estate properties. Revenue primarily comes from rent, but it also offers the potential for capital appreciation from building sales. Most REITs fall into this category.(2)
Mortgage REITs
Mortgage REITs (mREITs) primarily focus on generating income from issuing or investing in mortgages and mortgage-backed securities. Unlike equity REITs, they do not own properties directly. Mortgage REITs tend to be more leveraged, which can lead to an increase in risk, but also the potential to boost returns.(2)
Hybrid REITs
As the name suggests, hybrid REITs invest in a mix of actual real estate and mortgages/mortgage-backed securities. Hybrid REITs may appeal to more generalist investors, or those who want a more diversified approach. However, it’s important to note that all hybrid REITs might not be perfectly balanced but rather lean one way or another toward equity or mortgages.(2)
Potential Pros and Cons of Investing in REITs
Higher inflation rates have benefitted REITs in recent years, as competitors are limited in their ability to build new buildings, because the cost to enter markets by building new properties has increased alongside prices for land, materials, and labor.(1)
In general, real estate may provide diversification to partially offset stock market volatility in an investor’s portfolio.(1)
But while it can be difficult to gain real estate exposure by purchasing and managing a building or developing a piece of land, investing in shares of REITs may offer a practical and relatively liquid means of doing so.(1)
It’s important to note, however, that diversification and asset allocation do not ensure a profit or guarantee against loss.(1)
While REITs may be an attractive option for some, REITs are not all created equal. REITs typically specialize in certain types of properties, such as retail or apartment buildings, and business and consumer trends often influence real estate markets, benefiting some types of properties and disfavoring others.(1)
Unique Factors of REITs
REIT shares are liquid assets that partially divide their value from the ownership of illiquid assets. While that makes them unique, it can pose operating challenges as changes in real estate values can have a significant effect on real estate owners.(1)
REITs also come with unique tax and reporting complexities that other types of investments may not, which is why it’s important to reach out to an experienced professional. They may also offer knowledge of individual companies and real estate markets, and the ability to navigate potential risks while aiming to gain the possible benefits of diversification, income potential, and inflation hedging that may come with REITs.(1)
Article Sources:
(1) “What’s right with REITs,” Fidelity. Accessed June 23, 2025. https://www.fidelity.com/learning-center/trading-investing/investing-in-REITs. August 20, 2024.
(2) Campbell, Tessa and Jake Safane. “What are REITs?” Business Insider. Accessed June 23, 2025. https://www.businessinsider.com/personal-finance/investing/what-is-a-reit. April 3, 2025.