Real Estate Investment Trust (REIT)

A real estate investment trust, or REIT, is a company owning or financing income-producing property that has to distribute most of its taxable income to shareholders as dividends. Many trade on stock exchanges. Analysts estimate a REIT's implied cap rate by dividing its NOI by the market value of its properties as implied by its share price and debt.

That implied cap rate can differ from the cap rates on direct property sales. When REIT shares fall, their implied cap rates rise, sometimes before private market prices move. Some investors watch the gap as an early sign of where property cap rates are heading.

For an individual investor, REITs offer property income without management or large minimums. The trade-off is less control and daily price swings. Comparing a rental's cap rate with a REIT's dividend yield is a rough check on whether direct ownership pays enough for the extra work.