As long as this dividend requirement is met, the REIT does not pay taxes on its income and avoids the double taxation of regular corporations. By taxing income only at the shareholder level, REITs mimic one characteristic of direct property ownership. Mortgage REITs offer investors a chance to invest in a pool of real estate loans, while hybrid REITs own both real property and mortgages. MBS REITs invest in mortgage-backed securities, offering investors a chance to invest in the secondary mortgage market. REITs may add value to the assets they own through management expertise, franchising, and other forms of revenue enhancement that are permitted under IRS rules.
Investors typically invest in REITs for their high dividend yields and stable cash flows.
Because REITs derive their income from rents, they are often considered to be a hedge against inflation. The 1990s have witnessed tremendous growth in the REIT industry, which has helped to bring transparency to real estate markets through public disclosure. This development has restrained the excesses that have historically characterized the real estate market in the United States. In the first instance, a REOC may be indistinguishable from a REIT in all except tax status. In the second, a REOC may be involved, say, in the operation of hotels, a line of business that generates taxable revenue.