Understanding Real Estate Investment Trusts (REITs)

Income with Real Estate


Read More From Azzad’s White Paper Series

Investing Basics

There’s nothing complicated about common investing techniques, and it usually doesn’t take much time to understand the basics. The biggest risk you face is not educating yourself about which investments may be able to help you achieve your financial goals. Use this resource to get started today.

Retirement Savings

Planning for retirement isn’t always easy. But there are concrete ways to help you make it reality—including taking advantage of a company retirement plan and investing on your own. For Shariah-sensitive investors, you’ll also need to think about finding halal investment options. This paper suggests practical steps to getting started.

Education Savings

There’s no denying the benefits of a college education: the ability to compete in today’s competitive job market, increased earning power, and expanded horizons. But these advantages come at a price—college is expensive. And yet, year after year, thousands of students graduate from college. So, how do they do it? And how do you do it in a halal way?

Asset Allocation and You

Think of investing like baking a cake that requires flour, eggs, and milk. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining different types of investments, including halal fixed income, in a recipe that is appropriate for you.

Income with Real Estate

Investors in search of manageable income from real estate may want to consider a real estate investment trust, or REIT. A REIT is a company that buys, sells, develops, and manages real estate such as office buildings, apartment complexes, shopping malls, self-storage units, and housing developments. Successful REITs can offer investors high yields, current income, and moderate growth.

The Case for International Investing

Drawing on the expertise of Scout Investments, which runs Azzad Asset Management’s international portfolio, this paper explains why international stocks should be a part of any diversified portfolio.

Impact of Islamic Investment Criteria

Many Shari’ah-sensitive investors wonder how the Islamic screening process might affect the performance of their portfolios. As this paper outlines, the answer lies in part with the sector allocations of traditional portfolios and their Islamically screened counterparts.

Understanding Riba in Islamic Finance

Riba is one of the most often misunderstood terms in Islamic finance. More education on this fundamental concept is not only necessary for the preservation of a halal livelihood; it is also important for the preservation of the proper practice of Islam. Riba is prohibited by the Qur’an, Sunnah (Prophetic example), and consensus of the scholarly community.

Debt and Interest — Rethinking the Pillars of Borrowing and Lending

Azzad Asset Management actively avoids profiting from interest-based lending and from the trading of debt due to ethical and religious considerations. Learn more about the potential social harms of debt and interest and why it can make financial sense to steer clear of them.

Purifying Impermissible Assets

Is the purification of impermissible assets in a savings vehicle like a 401(k) possible according to the tenets of Shariah? This paper outlines the steps that should be taken to embrace a halal strategy in one’s financial affairs, including the most important step of all—repentance from the previous action.

A Sukuk Primer

Global sukuk demand is expected to grow from $240 billion in 2012 to $421 billion by 2016. Learn more about sukuk and sukuk investing.

Participating in an IPO

Initial public offerings, or IPOs, are a frequent topic of conversation among Azzad clients. But is it permissible to invest one? Get the halal perspective here.

Donor-Advised Funds

A donor-advised fund can achieve many of the goals of private foundations without the legal, administrative and accounting costs.

Charitable Lead Trusts

A charitable lead trust is a way for taxpayers to leverage their generosity, producing tax savings that can be used to provide greater benefit to themselves, spouses, charities, and others. It can allow the grantor to support a charitable cause for a certain time period while leaving the remainder to an individual beneficiary, helping to provide an income stream to a favorite charity and ensure a gift to specified individuals.

Reviving the Waqf

A waqf is an endowment created under Islamic guidelines. Learn how this product can help you leave a legacy for generations to come.


Investors in search of manageable income from real estate may want to consider a real estate investment trust, or REIT. A REIT is a company that buys, sells, develops, and manages real estate such as office buildings, apartment complexes, shopping malls, self-storage units, and housing developments. Rather than investing directly in a piece of real estate, REIT investors put their money into a professionally managed portfolio of properties.

REITs make money from rental income, services to tenants, and profits from the sale of properties. They also receive special tax considerations: REITs do not have to pay taxes as long as they pay out at least 90% of their net income to their shareholders. Because of this, successful REITs can offer investors high yields, current income, and moderate growth. This paper outlines important considerations for REIT investors.


Oftentimes during extreme stock market volatility, investors may start idealizing investing in real estate property. They put a down payment on a property and assume that the association fees, taxes and mortgage payments will be equal to what they could get in rental income. What many investors underestimate are the risks and expenses associated with being landlords.

To evaluate if a property will make a sound investment, consider the following:

  1. The expenses you will pay as a landlord. These will include higher interest rates, insurance premiums, taxes and annual maintenance of the property.
  2. The time you will need to spend acquiring, maintaining and managing the property. You could always pay someone else to manage the property on your behalf, but that will eat into your investment returns.
  3. Successful real estate investing requires a level of expertise and skill necessary to avoid unpleasant surprises like unexpected vacancies or buying property in a bad location.

Enter the real estate investment trust, or REIT.

REITs were created by the U.S. Congress in 1960 to give all Americans, not just property owners, the opportunity to invest in income-producing real estate.


One reason REITs may be right for you relates to diversification, or the idea of not putting all your eggs in one basket. REITs are an often overlooked and underexploited asset class for investors. They represent exposure to properties in a variety of geographic areas, not to mention a variety of commercial properties. These can include apartment buildings, storage facilities, shopping centers and other types of equity REITs. Allocating a sizeable portion of assets to a REIT can help improve a portfolio’s overall risk-adjusted return.

Next, REITs can provide current income. Because REITs are required to pay out 90% of their annual income in the form of dividends, you can expect to receive income from your REIT investment. Of course, be mindful that this is often taxed as ordinary income.

Azzad’s REIT portfolio invests primarily in equity REITs to avoid companies that derive income from interest, as mortgage REITs do. Potential investments are screened according to Azzad’s ethical investing guidelines to screen out REITs involved in lines of business that cause societal harm or that have high levels of debt.

Another advantage of investing in REITs is liquidity. If you need cash in a hurry, it is much easier to liquidate shares of a publicly traded REIT than it is to sell rental property, office buildings, or other real estate. Because REIT shares are typically traded on major exchanges, it is easier to buy and sell shares than to buy and sell properties in the private market.

Another positive characteristic of all REITs is professional management. Once you have purchased shares in a REIT, your investment is in the hands of people who make their living by buying, selling, and managing real estate. You do not have to be an expert real estate trader because trained professionals decide.

Last but not least, REITs offer access to new investment opportunities. Because you are pooling your money with the funds of many other investors, your initial cash outlay is much less than for other types of real estate investments. This makes REIT investing accessible for many people who cannot afford to buy office buildings and apartments on their own. And because your money is pooled with that of other investors, your personal exposure to risk is lower than if you were investing directly in real estate.


Supply/demand risk: REITs depend on an adequate supply of tenants and/or buyers to occupy their properties. During certain periods (e.g., a building boom or an economic downturn), the supply of available space may exceed the demand by significant margin, leaving REITs with property that is vacant or less than fully occupied. During these periods, it may also be difficult to make profits on rents because the excess supply of rental property will drive rental prices down. These factors can reduce a REIT’s profitability.

Interest rate risk: When interest rates increase, a REIT’s borrowing costs increase. This can affect a REIT’s bottom line. However, gradually rising interest rates can imply an improving economy, which is favorable to REITs, in general.

Real estate risk: REITs are also subject to the risks associated with the general real estate market, including possible declines in the value of real estate, changes in overall economic conditions, and the potential lack of availability of mortgage funds.


Many people have been conditioned by realtors to view their home as an investment. In some ways, this is true. The advantage of owning your own home is that you do not have to pay rent to live somewhere else. A home should be viewed as a consumption good that requires various expenses and, of course, does not generate income.

By contrast, owning REITs generates continual rental income. Furthermore, since your home is in a single location, its investment risk is not diversified. Your home’s value is dependent on the housing market in your area. By contrast, owning REITs offers far greater diversification because they represent exposure to a diversified investment with properties in a variety of geographic areas, not to mention multiple commercial properties.

Ask your Azzad investment advisor if investing in the Azzad REIT portfolio may be right for your financial situation.

Note: Information contained in this publication is not intended to replace specific advice or recommendations by your investment advisor. It is not intended to provide tax, legal, insurance or investment advice, and nothing in this publication should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Unless otherwise specified, you alone are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. Asset allocation and diversification cannot guarantee a profit or insure against a loss. There is no guarantee that any investment strategy will be successful; all investing involves risk, including the possible loss of principal. You should consult an attorney or tax professional regarding your specific legal or tax situation. Please check with your advisor for more information: 888.86.AZZAD or www.azzad.net.

Investments are not FDIC insured, nor are they deposits of or guaranteed by a bank or any other entity, so you may lose money. Azzad does not guarantee that your investment objectives will be achieved. Past performance cannot guarantee future results. Azzad only transacts business where it is properly registered or notice filed, or excluded or exempted from registration requirements. The Azzad Ethical Wrap Program is made available through an Investment Advisory Agreement and the firm’s
ADV Part II brochure. The Azzad Funds are available by prospectus only. To request a free copy, including other important disclosure information, please call 888-862-9923, 4/2015©