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 and Exam Essentials About REITs for the Series 7
Real Estate Investment Trusts (REITs) are a frequent topic on the Series 7 exam, especially in sections covering investment company products and alternative investments. Understanding what REITs are, how they work, and their regulatory treatment is essential to answer questions quickly and accurately on the exam.
Here’s a streamlined guide on REITs to help you focus on what matters most.
🎯 1. What Are REITs?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate.
REITs allow investors to pool their money to invest in real estate projects without having to buy property themselves.
🎯 2. Key Features of REITs
- Diversification: Investing in real estate without the risks of owning physical property individually.
- Liquidity: Many REITs trade on major stock exchanges, making them much more liquid than direct real estate investments.
- Income Focus: REITs are legally required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
- Tax Advantages:
- REITs themselves avoid corporate income tax if they meet IRS requirements.
- Dividends paid to investors are taxed as ordinary income.
🎯 3. Types of REITs
| Type | Focus | Notes |
|---|---|---|
| Equity REITs | Own and manage income-generating real estate | Revenue mainly from rents and property appreciation |
| Mortgage REITs | Invest in mortgages and mortgage-backed securities | Revenue mainly from interest on loans |
| Hybrid REITs | Combine ownership of properties and mortgages | Mixed income from rent and loan interest |
🎯 4. REIT Regulatory Requirements
- Must distribute 90% of taxable income to shareholders.
- Must derive at least 75% of gross income from real estate-related sources.
- At least 75% of assets must be in real estate.
- Must have at least 100 shareholders and no more than 50% of shares held by five or fewer individuals.
🎯 5. Advantages of Investing in REITs
- Steady Income Stream: Regular dividend payments.
- Portfolio Diversification: Exposure to real estate markets.
- Accessibility: Lower minimum investments compared to buying physical property.
- Liquidity: Publicly traded REITs can be bought and sold like stocks.
🎯 6. Disadvantages of Investing in REITs
- Tax Treatment: Dividends are taxed as ordinary income, not at lower qualified dividend rates.
- Interest Rate Sensitivity: REIT prices can fall when interest rates rise.
- Limited Growth Potential: Because REITs must pay out most of their income, they retain less capital for growth.
🎯 7. REITs on the Series 7 Exam: What to Expect
✅ Typical Question Styles:
- Characteristics of REITs (income requirements, taxation)
- Differences between equity, mortgage, and hybrid REITs
- Risk factors (e.g., liquidity, interest rate sensitivity)
- Advantages and disadvantages compared to direct real estate investing
✅ Important Tip:
Always remember that REIT dividends are taxable as ordinary income, and REITs must distribute 90% of taxable income to shareholders.
🚀 Quick Memory Aid for REIT Exam Facts
💡 “90-75-75-100 Rule”:
- 90% taxable income distributed
- 75% income from real estate
- 75% assets in real estate
- 100 shareholders minimum
🎓 Want a full REIT-focused practice quiz or flashcards for Series 7?
Access tailored Series 7 exam drills at:
👉 https://finra-exam-mastery.com
Master the details. Ace the Series 7. 🏆