Pic Source: Forbes, "3 Small Cap REITs Poised to Profit"
A Real Estate Investment Trust (REIT) is a tool that was created by the U.S. Congress in 1960 to provide a way for small-scale investors to invest in income-producing commercial, industrial, and residential real estate. It allows investors to buy an interest in property, without the hassle of daily management responsibilities. As a model, a REIT is a company that owns or finances income-producing real estate. In the same way shareholders benefit by owning stocks in other corporations, the "stockholders" of a REIT earn a share of the income produced through real estate investments without actually having to buy or finance property.
Although many REITs include affordable and mixed-income properties as part of broadly diversified portfolios, some REITs invest exclusively in affordable multifamily development. In some examples, like the REIT in Nevada called the Housing Partnership Equity Trust (HPET), REIT's can be set up to be a social venture owned by nonprofits and devoted to preserving affordable housing. Since 2012, the HPET has raised more than $100 million from private-sector investors and secured funding from the John D. and Catherine T. MacArthur Foundation.
In this business model a REIT acts as a real estate company that buys specific types of commercial properties. Investors' capital gets pooled together and then the REIT's management team purchases the type of properties the REIT specializes in. After expenses are paid, the bulk of the REIT's annual income is distributed to investors/shareholders as dividends. Any capital appreciation from the sale of properties is also distributed in the dividends.
In this scenario, investors are putting their money into the debt financing side of the business. The business model for mortgage REITs is to invest in real estate mortgages (mostly single-family home loans) or mortgage-backed securities. Investors in turn earn income from the interest paid on those investments and the sale of mortgages.
U.S News | How to Invest in Commercial Real Estate with REITs
Housing Partnership Network | Housing Partnership Equity Trust
HUD's PD&R Edge Magazine | Social-Purpose Real Estate Investment Trust Preserves Affordable Housing in Aurora
The Wall Street Journal | Nonprofit Firms Form REIT