Two investors are arguing about the types ofinvestmentmade by real estate investment trusts. One investor believes that REITs are investors inreal estate properties

The other investor believesthat REITs provide financing for the purchase ofreal estate properties. The two investors ask you:Who is right? How would you respond to theseinvestors?

A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Thus, both investors together have captured the definition of REITS. More details are given below.

A real estate investment trust (REIT) is an entity that issues stocks that represent an equity interest in one of the following: (1) a pool of real estate properties (called an equity REIT), (2) a pool of real estate mortgage debt (called a mortgage REIT), or (3) pool consisting of both real estate properties and real estate mortgage debt (called a hybridREIT). About 90% of the REITs traded are equity REITs. The mortgage REIT (which is the focus of our chapter) is a smaller sector within the REIT market. A company must satisfy certain requirements in order to qualify as a REIT under the federal income tax law. The bulk of its invested assets must be in real estate-related investments. As for the income generated, the source must come from primarily real estate investments, and at least 90% of its taxable income must be distributed to shareholders annually in the form of dividends.