The 13 Types of REITs: A Brief Introduction

“The 13 Types of REITs: A Brief Introduction” discusses REITs, or real estate investment trusts. They can be highly profitable investments for the savvy investor — but it’s important to know not just what a REIT is, but also how they can be classified, and in turn, how you can make the most money off of them.

What is a REIT?

REITs are required by law to distribute more than 90% of their earnings in the form of dividends. This can make them incredibly profitable for investors and provide a steady stream of cash flow in the form of regular, high dividends.

REITs invest in a wide range of property types that include apartment buildings, warehouses, offices, retail centers, medical facilities, data centers, hotels, cell towers and farmland. Typically, REITs focus on an individual property type, but some REITs do have diversified property portfolios. Investors can buy shares in a REIT just like any other equity.

REIT stocks can be organized into 13 different types based on their business model and the primary class of properties they hold. Each of these classes is listed below:

Investors buying shares of REITs must know the differences between the various classes in order to better understand and diversify their portfolios. Listed below is a brief overview of each sector, as well as a summary of the current sector-wide performance and how to invest in them for maximum profit.

The 13 Types of REITs: A Brief Introduction
#1: Office

Office REITs purchase, own and manage office real estate. These REITs rent out their properties to various corporate tenants, and spaces can vary from office parks to converted warehouses or skyscrapers. 

Some office REITs focus on specific industries, subdividing the sector into more nuanced categories — these classifications can include government agencies, central business districts, suburban offices, technology firms, financial institutions and more.

This wide variety of investable markets allows office REITs to be highly specialized, but perhaps their greatest advantage comes from their characteristically stable cash flow. By owning large office buildings and renting them out to several tenants at once, they are less reliant on single clients and more prepared to stay profitable in the event of multiple tenants breaking their leases. This makes them able to mute the negative impact of economic recessions, as they do not have to rent out all available space at once.

Office REITs are one of the larger real estate investment trust sectors, with 19 publicly traded companies in major US stock exchanges.

 Large office REITs include Alexandria Real Estate Properties, Inc (NYSE: ARE), Boston Properties, Inc (NYSE: BXP) and SL Green Realty Corporation (NYSE: SLG). 

The 13 Types of REITs: A Brief Introduction
#2: Retail

Retail REITs acquire and develop properties in the retail space, including outlet centers, shopping malls, power centers, strip malls and freestanding retail properties. Like office REITs, many retail REITs specialize in a particular type of client, property or location.

The advantages of retail REITs are in many ways similar to those of office REITs — when owning a large property such as a shopping mall, there is little reliance on the stability of a particular company due to the REIT’s diversification across multiple clients. That said, in many cases, larger clients are still very important to these retail spaces. Large box stores (known in the REIT space as an “anchor tenant”) can provide a stable cash flow whilst attracting business, and with it, several smaller stores.

Among freestanding stores, retail REITs use triple net leases and require their tenants to cover building insurance, real estate taxes and building maintenance in addition to their base rental rate. This makes freestanding store tenants highly stable and able to provide large, uninterrupted cash flow.

There are currently 20 retail REITs trading on major US stock exchanges. The following three REITs each focus on a different type of retail property: Simon Property Group (NYSE: SPG) features malls, Realty Income Corporation (NYSE: O) owns single-tenant retail properties and Acadia Realty Trust (NYSE: AKR) invests in shopping centers.

The 13 Types of REITs: A Brief Introduction
#3: Industrial

Industrial REITs own and manage properties used in manufacturing and production as well as distribution and even storage of goods.

Like all other REITs, industrial REITs must pay at least 90% of their net revenue back to shareholders. This allows investors an efficient, diversified mode of investing in property types otherwise inaccessible, such as factories, warehouses, distribution centers and (now surging in popularity) e-commerce fulfillment centers.

What all of these buildings have in common is a minimal need for structural customization. Industrial REITs have an advantage over other REITs in that they require comparably low startup capital to build or prepare their properties — industrial centers need floor plans, locations outside of town for delivery truck accessibility and next to no aesthetic makeover to appease tenants’ more emotional wants.

This leaves industrial REITs with minimal expenses and allows them to be highly efficient, returning greater profits back to their shareholders. There are 19 REITs of this type trading on major US stock exchanges.

Some large-cap industrial REITs include Duke Realty Corporation (NYSE: DRE), STAG Industrial, Inc (NYSE: STAG) and Monmouth Real Estate Investment Corporation (NYSE: MNR).

The 13 Types of REITs: A Brief Introduction
#4: Residential

Residential REITs specialize in various types of residential properties including multi- and single-family homes, apartment buildings, manufactured homes and student housing. Most residential REITs will focus on one of these building types, but can also subdivide their specialization into geographical markets and other distinguishing factors.

The portfolios of these REITs differ widely, ranging from urban apartment complexes to suburban housing units. Due to the continued need for housing in metropolitan areas (where most residential REITs focus their investments), these stocks provided stable income over a long period of time.

The additional risk factor that comes from residential REITs is the occasionally lower credit of their tenants, as they often rent out to regular families instead of massive corporate clients. But, this risk is typically mitigated by the unusually large number of tenants’ residential REITs service, giving them additional “security by diversification” when compared to other investment trusts.

There are 18 residential REITs trading on major US stock exchanges. The following each specialize in different types of properties: Bluerock Residential Growth REIT (AMEX: BRG) focuses on apartments,  Front Yard Residential Corporation (NYSE: RESI) rents out single-family homes, and Sun Communities, Inc. (NYSE: SUI) features manufactured homes. 

The 13 Types of REITs: A Brief Introduction
#5: Hotel & Motel

Hotel & Motel REITs, also known as Lodging REITs or Hospitality REITs, own and manage hotels, resorts, and other travel accommodations. Their customers can range from vacationing guests to business travelers, and the REITs work closely with other businesses in the hospitality industry (including food service, experiences, etc).

While investing in hotel & motel REITs can be highly profitable, they do have the notable drawback of seasonality. Since a great deal of income is brought on by tourism, profits are higher during the summer months and holiday weeks and sometimes considerably lower elsewhere. This can cause more volatile share prices than other similar investments.

While good hotel & motel REITs are adequately diversified to combat this instability — often done by investing in properties with substantial business trip and stakeholder meeting popularity — it can be a risk factor for newer investors or those more unfamiliar with REITs. Before investing in a REIT of this kind, investors should find patterns in the yearly price changes and be acutely aware of what kind of seasonal volatility they can expect.

There are 12 hotel & motel REITs on major US stock exchanges. To name a few larger ones, consider Apple Hospitality REIT, Inc. (NYSE: APLE), Host Hotels and Resorts, Inc. (NASDAQ: HST) and Sunstone Hotel Investors, Inc. (NYSE: SHO).

The 13 Types of REITs: A Brief Introduction
#6: Healthcare

Healthcare REITs develop and operate healthcare facilities and properties in related industries. The properties owned by these REITs can include hospitals, clinics, medical offices, research buildings, senior living communities, skilled nursing facilities and more.

Because many of the tenants of these properties are long term, specialized customers, healthcare REITs utilize triple net leases similar to large retail REITs. This requires tenants to cover the base rent in addition to maintenance, real estate taxes and building insurance, adding extra cash flow and decreased risk to the REITs owning the land.

The large advantage of healthcare REITs is the already massive and quickly growing US medical industry. In 2019, healthcare spending peaked at $3.8 trillion and is on track to pass $6 trillion in annual spending by the end of 2028. This increased spending on healthcare means increased need for infrastructure, in everything from hospital spaces to larger senior housing communities for the aging baby boomer generation.

The major US stock exchanges currently house 14 healthcare REITs. Large health care REITs include Welltower, Inc. (NYSE: WELL), Healthpeak Properties, Inc. (NYSE: PEAK) and Omega Healthcare Investors, Inc. (NYSE: OHI).

The 13 Types of REITs: A Brief Introduction
#7: Data Centers

Data Center REITs own and operate critical data storage and transmission infrastructure. These centers are necessary to house the server rooms and networking equipment to support businesses in virtually every industry.

Like other REITs, data center REITs manage properties especially designed for their sector’s specific business needs. In this case, data centers are required to have highly regular power, controlled temperature and humidity, tight building security and other measures necessary to ensure the safety and accessibility of companies’ data.

In addition to renting out space to tenants — be it several tenants in a single building or just one in a hypercenter — data center REITs often provide connection services allowing for physical connections between companies’ servers.

Data center REITs are relatively recession-proof due to the ultra-long-term leases signed by their tenants. They also benefit from the growing need for data-related services, following the rapid growth in data usage currently underway. This growth has only been accelerated by the surge in remote-work popularity and increasing reliance on stable internet connections.

There are just 5 major data center REITs trading on large US stock exchanges. Three large data center REITs are Equinix, Inc. (NASDAQ: EQIX), Digital Realty Trust, Inc. (NYSE: DLR) and CyrusOne, Inc. (NASDAQ: CONE).

The 13 Types of REITs: A Brief Introduction
#8: Self-Storage

Self-Storage REITs own and operate self-storage facilities, leasing out storage space to customers on a short-term basis.

REITs of this type can be wonderful from a risk-reward perspective. Although leases are typically on a month-to-month basis, leading to some instability on the part of the property owners, the facilities themselves are incredibly low-cost. With minimal construction, little necessary ongoing maintenance and few operational costs, self-storage REITs are an incredibly slim operation. Some REITs of this type claim they can break even with as little as 30% of its available capacity occupied.

Despite this favorable cost structure, self-storage REITs are not without risk. Storage of this kind is a discretionary expense, meaning they usually face more vacancies than other classes of REITs during economic recession.

There are 6 self-storage REITs traded on major US stock exchanges. Widely known storage REITs are Public Storage (NYSE: PSA), Extra Space Storage Inc. (NYSE: EXR) and CubeSmart (NYSE: CUBE). 

The 13 Types of REITs: A Brief Introduction
#9: Timber

Timber REITs own and operate the land used for harvest and sale of timber. Also known as timberland REITs, these REITs offer a diversification opportunity for real estate investors due to the completely different profit model, not relying on rent-paying tenants in the same way other REITs do.

Timber REITs are then structured less like a real estate equity and more like a commodity, maintaining similar ebb and flow in its profitability and share price to other cyclical stocks such as oil and basic materials.

This in mind, although the primary mode of profit for timberlands is the sale of timber and wood products, the singular goal of these organizations is to maximize the value of their land. In some cases this means renting out the real estate to tenants or even maintaining the land as a conservation site or park.

The risk and reward associated with timber REITs are largely the same ones associated with basic commodities. Lumber prices are currently high, benefiting real estate investors in the timberland sphere greatly, but lengthy periods of low lumber prices can force timber REITs to cut their dividend.  This makes timber REITs more cyclical in nature than the other REITs described on this list.

Timber is a small sector, with only 4  publicly traded timber REITs. They are CatchMark Timber Trust, Inc. (NYSE: CTT), Weyerhaeuser Company (NYSE: WY), PotlatchDeltic Corporation (NASDAQ: PCH) and Rayonier Inc. (NYSE: RYN). 

The 13 Types of REITs: A Brief Introduction
#10: Infrastructure

Infrastructure REITs operate and own real estate which pertains to infrastructure, including fiber cables, wireless infrastructure, telecommunications towers and energy pipelines. These REITs can be wrapped into the private sector or occasionally do a great deal of government contracting, depending on the asset class they focus on.

Some infrastructure REITs strictly invest in domestic real estate assets, while others invest globally. U.S.-based assets are typically safer and easier to predict, but international investments can offer far more growth potential.

It is important for investors to know that the types of industries that lease properties from infrastructure REITs are highly regulated, and these regulations can work against REITs, or in favor of them. For example, some regulations may be very costly to implement, but other regulations may give REITs strong pricing power and tenant retention. 

There are 6 infrastructure REITs currently trading on major US stock exchanges. Large infrastructure REITs include American Tower Corporation (NYSE: AMT), Crown Castle International Corp (NYSE: CCI) and SBA Communications Corp. (NASDAQ: SBAC). 

The 13 Types of REITs: A Brief Introduction
#11: Mortgage

Mortgage REITs are a unique beast in the real estate investment trust world, and similar to timber REITs, have a profit structure entirely different from other similar organizations. These organizations are structured like REITs and benefit form the same tax advantages, but they own interest-bearing assets like mortgages and mortgage-backed securities instead of “real-world” real estate.

While mortgage REITs often own some physical properties, the bulk of their income comes from funding mortgage credit for homeowners and businesses. They use private capital to buy residential mortgages, mortgage-backed securities, and provide liquidity and credit to stable clients.

These REITs can be highly profitable, and are also highly necessary to the US economy. The organizations facilitate housing market ownership by moving more money between banks and individual buyers, whilst making the process of purchasing a property less risky for all other parties involved.

By their business structure, mortgage REITs have many long-term holdings and debt equities that pay interest year after year. They are closely tied to the REPO market, a highly liquid chain of transitions between financial institutions, and have a great deal of financial stability when compared to other real estate investment trusts who are more reliant on the value of their property.

There are 19 mortgage REITs on major US stock exchanges. Some mortgage REITs include Annaly Capital Management, Inc. (NYSE: NLY), AGNC Investment Corp. (NASDAQ: AGNC) and New Residential Investment Corp. (NYSE: NRZ).

The 13 Types of REITs: A Brief Introduction
#12: Specialized

Specialty REITs meet all of the REIT qualifications, but they do not own properties that fit one of the traditional REIT categories. They make up, effectively, all of the REITs that have not been mentioned on this list yet. Specialty REITs may own movie theaters, casinos, farmland, outdoor advertising sites and virtually any other real estate class imaginable.

Specialty REITs cover a wide range of property types, so it’s impossible to identify universal risks for specialty REITs. For instance, a REIT that owns farmland would have a completely different risk profile than one that owns movie theaters. The risks are relative to the properties within the specialty REIT’s portfolio.

The strength of speciality REITs lies in the investors’ ability to invest in asset classes they know and understand whilst benefiting from the tax and dividend advantages of the REIT structure.

There are 16 specialty REITs trading on major US stock exchanges. Specialty REITs include VICI Properties Inc (NYSE: VICI), Iron Mountain, Inc. (NYSE: IRM) and Gaming and Leisure Properties, Inc. (NASDAQ: GLPI).

The 13 Types of REITs: A Brief Introduction
#13: Diversified

Diversified REITs are those REITs that lack a single specialization, instead opting to invest in multiple industry sectors and reap the benefits of diversification. Owning and operating a mix of different properties, a diversified REIT might own industrial, retail and health care properties, for example.

Diversified REITs offer a great way to invest in multiple types of real estate at once. Diversified REITs also mitigate the risks associated with specific property types, as the REIT still has the potential to perform well even when one of its property types isn’t producing much income. The potential pitfalls of diversified REITs varies by individual REIT, and depends on the properties in a given REIT’s portfolio.

This leaves much of the work of diversification to the managers, requiring less work on the part of the investor when you find a REIT you like and trust.\

There are currently 19 diversified REITs trading on major US stock exchanges. Some examples of diversified REITs are W. P. Carey Inc (NYSE: WPC), VEREIT, Inc. (NYSE: VER) and Vornado Realty Trust (NYSE: VNO).

How to Invest in REIT Stocks

All 13 REIT sub sectors follow the same investment process. Shares of publicly traded REITs can be bought and sold on major public exchanges, the exact same way that any equity stock is bought and sold. Investors can also invest in public REITs through a REIT mutual fund or a REIT ETF.

There are privately held REITs that can also be purchased, however investing in them is more complicated than buying shares in publicly traded REITs. Privately held REITs generally are limited to individuals and institutions who meet certain financial criteria.