Real Estate Investment Trusts (REITs) – Series 7 Exam
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
🧾 Real Estate Investment Trusts (REITs) – Series 7 Exam
📘 Key Concepts, Rules, and Practice Points for REITs on the Series 7
Real Estate Investment Trusts (REITs) are a tested topic on the Series 7 exam, falling under investment company products and packaged securities. To score well, you need to know how REITs work, how they are structured, their advantages and risks, and how they differ from other real estate and fund investments.
Here’s a full, clean summary focused on exactly what you need for the exam:
🎯 1. What is a REIT?
- A Real Estate Investment Trust is a company that owns, operates, or finances income-producing real estate.
- Investors buy shares of the REIT, providing liquidity compared to direct real estate ownership.
- REITs offer a way for investors to access real estate markets without owning properties directly.
🎯 2. Key Features of REITs
| Feature | Details |
|---|---|
| Liquidity | Traded REITs are listed on exchanges (like stocks). |
| Diversification | Broad exposure to real estate sectors (e.g., residential, commercial, healthcare). |
| Dividends | REITs must distribute at least 90% of taxable income to shareholders annually. |
| No Corporate Tax | As long as the REIT meets distribution and income rules. |
| Pass-Through Structure | Similar to mutual funds – income is passed directly to investors. |
🎯 3. REIT Qualification Rules
For a company to qualify as a REIT under IRS rules, it must:
- Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries.
- Derive at least 75% of gross income from rents, mortgage interest, or real estate sales.
- Pay at least 90% of taxable income as dividends to shareholders.
- Have at least 100 shareholders after the first year.
- No more than 50% of shares can be held by five or fewer individuals.
🎯 4. Types of REITs
| Type | Focus |
|---|---|
| Equity REITs | Own and manage income-producing real estate properties (e.g., malls, offices). |
| Mortgage REITs | Invest in mortgages and mortgage-backed securities (generate income through interest). |
| Hybrid REITs | Combine owning property and holding mortgage loans. |
🎯 5. Advantages and Disadvantages
✔️ Advantages:
- High dividend income
- Liquidity (for publicly traded REITs)
- Portfolio diversification
- Inflation hedge (real estate values often rise with inflation)
❌ Disadvantages:
- Dividends taxed as ordinary income (not qualified dividends)
- Subject to market volatility like stocks
- Sensitive to interest rate changes (higher rates can hurt REIT prices)
🎯 6. Public vs. Private REITs
| Public REITs | Private REITs |
|---|---|
| Listed on national exchanges | Not publicly traded |
| Regulated by the SEC | Less regulated |
| More liquid | Less liquid |
| Subject to market price fluctuations | May have valuation challenges |
🎯 7. Common Series 7 Exam Questions About REITs
✔️ Is a REIT an investment company under the Investment Company Act of 1940?
→ No. REITs are not regulated like mutual funds or closed-end funds under this Act.
✔️ Are REIT dividends taxed at capital gains rates?
→ No. Dividends from REITs are typically taxed as ordinary income.
✔️ Can REITs help diversify a traditional stock and bond portfolio?
→ Yes. They provide real estate exposure, which is different from stocks and bonds.
✔️ Are REITs suitable for investors seeking income?
→ Yes. Due to the high mandatory dividend payout, REITs are often used for income-focused portfolios.
🚀 Conclusion: What to Memorize for REITs on the Series 7
- 90% income distribution rule
- 75% asset and income test
- Taxation at ordinary income rates
- Liquidity difference between public and private REITs
- REITs are NOT investment companies under the 1940 Act
If you know these core facts cold, you’ll easily handle REIT-related questions on the exam.
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