A financial instrument that invests primarily in real estate such as offices, apartments, shopping centers, hotels, or warehouses. REITs tend to pay high returns (often as high as 10 percent), making them attractive investment opportunities, especially when the stock market is falling. Returns on REITs are high because the Internal Revenue Service requires them to pay out at least 90 percent of their taxable income each year in order to retain their favorable tax treatment. REITs are entitled to deduct dividends paid to shareholders from their taxes.
REITs were created by federal law in 1960 to enable small investors to pool their money and invest in real estate while being able to diversify their risk and have professional managers. There are three main types of REITs: mortgage REITs, equity REITs, and hybrid REITs. A mortgage REIT makes or owns loan obligations that are secured by real estate property; an equity REIT owns real estate, rather than issuing loans; and a hybrid REIT combines both strategies.