***continued**
So how do they work?
As an example, say I want to build a office park. I would form a REIT to hold title to the park, and entitle us to all the benefits of the REIT.
Fortunately, my development was successful so I build more and more. But I also want to buy some existing offices, and we need money to do it.
So we decide to go public, and list our stock on the NY Exchange. Because business is profitable, and we don't pay Federal income taxes, institutional investors buy our stock to add to their Real Estate specific mutual funds or ETF's.
Although these mutual funds and ETF's are normally referred to as "REITs", they aren't actually organized as REIT's.
They operate just like a typical fund or ETF would, with a slightly higher payout.
The parent company that actually owns, manages, or develops real estate projects is the actual REIT. A great example would be Realty Income Corp, "O".
They market themselves as the "monthly dividend company', and rightfully so after 45 years of solid dividends with increases. They have a great website that really goes into the numbers behind rising and compounding dividends.
Typically, they will buy shares in many different corporations and types of REIT's, creating a diversified portfolio of real estate holdings that are usually not affected by interest rates, employment, or any of the other conditions that tend to affect real estate values. This also creates a highly stable dividend environment.
In addition, because of their unique structure, "themed" ETF's have been developed, which limit their REIT investments to those that invest in companies that are similar in operation and holdings. For example, iShares has REITs that invest solely in Residential Apartments, Government Properties, and Health Care properties. Without a doubt, there is an ETF available for almost anything someone could want to invest in.