Real Estate Funds

  • Real estate investment trusts (REIT) are companies similar to mutual funds that hold portfolios of real estate and real estate related financial instruments for the benefit of their shareholders. Real estate held by REITs includes multifamily residential, retail, office, industrial, health care, and hotel properties and self-storage facilities; the financial instruments held by REITs are construction and development loans, mortgages, and mortgage-backed securities. REITs are restricted to earning their income mainly from passive sources (that is rents, interest, dividends, and gains from sales) and are exempt from federal corporate income tax if the major portion of their income is from real estate or mortgages and if they distribute nearly all of their income to their shareholders. REITs as a group suffered a severe decline during the late 1970s, but since the early 1990s they have grown strongly; REIT equity shares have become a popular form of investment with both individuals and institutions because they provide a relatively liquid means of investing in real estate. Several variants of the REIT structure have developed in response to tax considerations. REITs obtain the majority of their funds through equity issues, but they also borrow in the credit markets.