REITs are companies that invest primarily in income producing commercial real estate or real estate related loans. REITs enable individuals to make an investment in a diversified professionally managed portfolio of real estate assets. Generally, REITs are not subject to corporate level income taxes if they distribute substantially all of their income to shareholders. As a result, REITs tend to pay relatively higher dividends than other types of companies, and dividends earned by shareholders from REITs are usually taxed as ordinary income.
REITs can generally be classified as either “equity REITs”, “mortgage REITs” or “hybrid REITs”. Equity REITs invest the majority of their assets directly in commercial property and derive their income primarily from rents; equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest a majority of their assets in real estate mortgages and derive their income primarily from interest payments. Hybrid REITs combine the characteristics of both equity REITs and mortgage REITs.