A REIT is a company that owns income-producing real estate and pays most of its profits to shareholders

REIT stands for Real Estate Investment Trust. It is a company that buys, owns, and manages real estate — apartment buildings, office parks, shopping centers, warehouses, hotels, or medical facilities. Instead of keeping the profits, a REIT must distribute at least 90 percent of its taxable income to shareholders each year. That distribution is what makes a REIT different from a regular real estate company: you get paid regularly just for owning shares.

You do not own the building itself. You own a share of the company that owns it. The REIT's managers handle all the work — finding tenants, collecting rent, maintaining the property, paying property taxes. You receive a check (or a deposit) based on how many shares you hold and how much profit the REIT made that year.

REITs trade on stock exchanges like the New York Stock Exchange, or on over-the-counter markets. You can buy and sell them through a brokerage account the same way you would buy stock in Apple or Microsoft. Some REITs are publicly traded (anyone can buy them); others are private (sold only to institutional investors or accredited investors).

Key Takeaways

  • A REIT is a company that owns real estate and must pay out 90 percent of its taxable income to shareholders each year.
  • You own shares in the company, not the property itself, and you receive income distributions regularly rather than waiting for the property to sell.
  • Publicly traded REITs can be bought and sold through a brokerage account like any stock, making them more liquid than owning property directly.
  • REITs are taxed differently than stocks — distributions are taxed as ordinary income, not capital gains, which affects what you owe at tax time.
  • Different REITs focus on different property types: residential, commercial, industrial, healthcare, or a mix of several.

How a REIT makes money and pays you

A REIT earns money from rent paid by tenants. If a REIT owns an apartment complex with 100 units renting for $1,500 per month, it collects $150,000 per month in rent. After paying property taxes, insurance, maintenance, staff salaries, and other operating costs, whatever is left over is the profit.

By law, the REIT must distribute at least 90 percent of that profit to shareholders. If the REIT made $10 million in taxable income and has 10 million shares outstanding, each share receives $0.90 in distributions. If you own 100 shares, you receive $90. These distributions are usually paid quarterly (four times per year), though some REITs pay monthly.

You also benefit if the REIT's properties increase in value. If the REIT buys a building for $50 million and it becomes worth $60 million, the company's value rises. The share price may rise with it, and you can sell your shares for more than you paid. This capital gain is separate from the income distribution.

Types of REITs based on property focus

REITs specialize in different kinds of real estate. A residential REIT owns apartment buildings and single-family rental homes. A commercial REIT owns office buildings and retail space. An industrial REIT owns warehouses and distribution centers. A healthcare REIT owns hospitals, medical office buildings, and senior living facilities. A diversified REIT owns a mix of property types.

The type matters because different properties perform differently in different economic conditions. During a recession, office buildings may struggle while warehouses stay busy. During a housing shortage, residential REITs may thrive. Some investors choose a single-type REIT to focus on one sector; others buy several types to spread the risk.

Publicly traded versus private REITs

A publicly traded REIT is listed on a stock exchange and anyone with a brokerage account can buy shares. You can sell your shares anytime the market is open, usually within minutes. The share price changes throughout the day based on supply and demand, just like any stock. Examples include large REITs like Prologis (industrial), Realty Income (commercial), and Welltower (healthcare).

A private REIT is not listed on an exchange. Shares are sold directly by the company, usually to institutional investors, wealthy individuals, or people who meet the Securities and Exchange Commission's definition of an accredited investor (generally $200,000 in annual income or $1 million in net worth, not counting your home). Private REITs are less liquid — you cannot sell quickly — and often have higher minimum investments.

There is also a middle ground: non-traded REITs. These are registered with the SEC but do not trade on an exchange. They are sold through financial advisors and have restrictions on when and how you can sell your shares.

How REIT distributions are taxed

REIT distributions are taxed as ordinary income, not as capital gains. This is a crucial difference. If you receive $1,000 in REIT distributions, that $1,000 is taxed at your regular income tax rate — which may be 22 percent, 24 percent, 32 percent, or higher depending on your income bracket. If you sold a stock and made $1,000 in capital gains, it might be taxed at only 15 percent or 20 percent.

The REIT itself does not pay income tax on the money it distributes (that is why it can distribute 90 percent of profits). But you, the shareholder, pay tax on what you receive. The REIT will send you a Form 1099-DIV each January showing how much you received in distributions, and you report that on your tax return.

If you own a REIT in a tax-advantaged account like a 401(k) or IRA, the distributions are not taxed until you withdraw the money from the account. This is one reason some investors hold REITs in retirement accounts rather than regular brokerage accounts.

Advantages of investing in REITs

REITs let you own real estate without buying a building, managing tenants, or maintaining the property. You get the income and potential appreciation without the work. You also get liquidity — with a publicly traded REIT, you can sell your shares in minutes if you need cash. Selling a building takes months.

REITs are also transparent. They file regular reports with the SEC, publish quarterly earnings, and disclose their holdings. You can research a REIT's properties, occupancy rates, and financial health before you invest. With a private real estate deal, you often have much less information.

REITs also offer diversification. A single REIT might own 50 or 100 properties across multiple cities. If one property has a vacancy or a tenant stops paying, the REIT's overall income is barely affected. If you own one rental house and the tenant leaves, your income drops to zero.

Risks and drawbacks of REITs

REIT share prices fluctuate. If interest rates rise, investors may sell REITs and buy bonds instead, driving the share price down. If the economy slows and tenants struggle to pay rent, the REIT's income falls and the share price may fall with it. You could lose money if you sell when the price is low.

REITs are also sensitive to inflation and interest rates. When the Federal Reserve raises interest rates to fight inflation, borrowing becomes more expensive for REITs. Many REITs use debt to buy properties, so higher rates cut into profits. At the same time, higher rates make bonds and savings accounts more attractive, so investors may move money out of REITs.

The tax treatment is also a drawback for some investors. Because distributions are taxed as ordinary income, not capital gains, REITs can be tax-inefficient in a regular brokerage account. This is why financial advisors often recommend holding REITs in a 401(k) or IRA if possible.

How to research and compare REITs

Start by identifying the property type that interests you: residential, commercial, industrial, healthcare, or diversified. Then look at the REIT's dividend yield — the annual distribution divided by the share price. A REIT trading at $50 per share that pays $2 per year in distributions has a 4 percent yield. Compare yields across similar REITs, but remember that a higher yield sometimes signals higher risk.

Check the REIT's occupancy rate — the percentage of rentable space that is leased. A 95 percent occupancy rate is healthy; 80 percent suggests the REIT is struggling to find tenants. Look at the debt-to-assets ratio to see how much the REIT borrows. Higher debt means more risk if interest rates rise or the economy slows.

Read the REIT's quarterly earnings report and annual 10-K filing, both available on the SEC's EDGAR database or the REIT's investor relations website. These documents explain what properties the REIT owns, how much rent it collects, what expenses it pays, and what management expects in the coming year.

Frequently Asked Questions

Can I lose money investing in a REIT?

Yes. The share price can fall if interest rates rise, the economy weakens, or the REIT's properties lose tenants. You could sell at a loss. However, if you hold the REIT long-term and reinvest the distributions, you may recover losses over time. The income distributions themselves are separate from the share price risk.

Do I need a lot of money to invest in a REIT?

For a publicly traded REIT, no. You can buy a single share through most brokerages for the current share price — often $50 to $150 per share. Private REITs typically require much larger minimums, sometimes $25,000 or more. Some brokerages also offer fractional shares, so you can invest any dollar amount.

What is the difference between a REIT and a real estate mutual fund?

A REIT is a company that owns real estate directly. A real estate mutual fund is a pool of money that invests in multiple REITs or real estate companies. A mutual fund gives you diversification across many REITs with a single purchase, but you pay a management fee. A REIT gives you direct ownership of a specific company.

Should I hold REITs in a regular brokerage account or a retirement account?

If possible, hold REITs in a 401(k) or IRA to avoid paying ordinary income tax on distributions each year. If you have maxed out your retirement account contributions, a regular brokerage account works, but expect to owe taxes on the distributions annually. Some investors hold REITs only in retirement accounts for this reason.

What happens to my REIT shares if the company goes bankrupt?

Shareholders are last in line. Creditors and bondholders are paid first from the company's assets. Shareholders may lose their entire investment. This is why researching a REIT's debt level and financial health matters. A REIT with low debt and strong occupancy is less likely to face bankruptcy.