Congress established REITs in 1960 as an amendment to the Cigar Excise Tax Extension. The provision allows investors to buy shares in commercial real estate portfolios—something that was previously available only to wealthy individuals and through large financial intermediaries.

Properties in a REIT portfolio may include apartment complexes, data centers, healthcare facilities, hotels, infrastructure—in the form of fiber cables, cell towers, and energy pipelines—office buildings, retail centers, self-storage, timberland, and warehouses.

In general, REITs specialize in a specific real estate sector. However, diversified and specialty REITs may hold different types of properties in their portfolios, such as a REIT that consists of both office and retail properties.

Many REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session. These REITs typically trade under substantial volume and are considered very liquid instruments.

Most REITs operate along a straightforward and easily understandable business model: By leasing space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends. REITs must pay out at least 90% of their taxable income to shareholders—and most pay out 100 %. In turn, shareholders pay the income taxes on those dividends.

There are three types of REITs:

• Equity REITs. Most REITs are equity REITs, which own and manage income-producing real estate. Revenues are generated primarily through rents (not by reselling properties).

• Mortgage REITs. Mortgage REITs lend money to real estate owners and operators either directly through mortgages and loans, or indirectly through the acquisition of mortgage-backed securities. Their earnings are generated primarily by the net interest margin—the spread between the interest they earn on mortgage loans and the cost of funding these loans. This model makes them potentially sensitive to interest rate increases.

• Hybrid REITs. These REITs use the investment strategies of both equity and mortgage REITs.

REITs can play an important part in an investment portfolio because they can offer a strong, stable annual dividend and the potential for long-term capital appreciation. REIT's total return performance for the last 20 years has outperformed the S&P 500 Index, other indices, and the rate of inflation. As with all investments, REITs have their advantages and disadvantages.

On the plus side, REITs are easy to buy and sell, as most trade on public exchanges—a feature that mitigates some of the traditional drawbacks of real estate. Performance-wise, REITs offer attractive risk-adjusted returns and stable cash flow. Also, a real estate presence can be good for a portfolio because it provides diversification and dividend-based income—and the dividends are often higher than you can achieve with other investments.

As a bonus, the Tax Cuts and Jobs Act of 2017 allows taxpayers to take advantage of the qualified business income (QBI) deduction. The deduction is the QBI plus 20% of qualified REIT dividends or 20% of the taxable income minus net capital gains, whichever is less.

On the downside, REITs don't offer much in terms of capital appreciation. As part of their structure, they must pay 90% of their income back to investors.1 So, only 10% of taxable income can be reinvested back into the REIT to buy new holdings. Other negatives are that REIT dividends are taxed as regular income, and some REITs have high management and transaction fees.

Another consideration when choosing REITs is to look at the sectors of the real estate market that are hot. Which booming sectors of the economy, in general, can be tapped into via real estate? As an example, healthcare is one of the fastest-growing industries in the U.S.A especially in the growth of medical buildings, outpatient care centers, eldercare facilities, and retirement communities.

Several REITs focus on this sector. Healthpeak Properties (PEAK)—formerly HCP— is one example. As of April 2022, it had a market cap of nearly US $18.9 billion, with some 4 million shares traded daily. Its portfolio focuses on three core asset classes: life sciences facilities, medical offices, and senior housing, owning interests in more than 615 properties.

REIT stands for "Real Estate Investment Trust". A REIT is organized as a partnership, corporation, trust, or association that invests directly in real estate through the purchase of properties or by buying up mortgages. REITs issue shares that trade stock exchange and are bought and sold like ordinary stocks. In order to be considered a REIT, the company must invest at least 75% of its assets in real estate and derive at least 75% of its revenues from real estate-related activities.