What a REIT Actually Does

A REIT (Real Estate Investment Trust) is a company that owns buildings, land, or mortgages and pays out most of its profits to shareholders. Instead of buying a building yourself, you buy shares in a REIT, and the REIT's managers handle finding properties, maintaining them, collecting rent, and managing tenants. You receive a portion of the income the REIT generates — usually through dividends paid quarterly or monthly.

The key mechanic is this: REITs must distribute at least 90 percent of their taxable income to shareholders each year. That requirement is why REITs tend to pay higher dividends than regular stocks. In exchange for that payout rule, REITs get special tax treatment — the company itself pays no federal income tax, so the income flows through to you without being taxed twice.

You can buy REIT shares through a regular brokerage account the same way you buy stock. You do not need to own property, manage tenants, or put down a down payment. The REIT does all that work, and you own a piece of the income stream.

Key Takeaways

  • A REIT is a company that owns real estate or mortgages and must pay out 90 percent of its profits to shareholders each year.
  • You buy REIT shares through a brokerage account like any stock, and you receive dividend payments from the rental income or mortgage interest the REIT collects.
  • REITs come in different types — some own apartments, others own office buildings, shopping centers, hospitals, or just mortgages — so you can target the real estate sector you want.
  • REIT dividends are taxed as ordinary income, not capital gains, so the tax bill is usually higher than owning stocks that pay lower dividends.
  • REITs trade on stock exchanges during market hours, so you can sell your shares whenever you want, unlike owning physical property.

The Three Main Types of REITs

Equity REITs own the buildings themselves. They collect rent from tenants and pass that income to shareholders. An apartment REIT owns residential buildings; an office REIT owns office parks; a retail REIT owns shopping centers. The REIT's profit depends on how much rent it collects and how well it maintains the properties.

Mortgage REITs do not own buildings. Instead, they lend money to real estate developers and property owners, and they collect the interest payments. When interest rates rise, mortgage REITs often benefit because they can lend at higher rates. When rates fall, their income shrinks.

Hybrid REITs do both — they own some properties and hold some mortgages. These are less common than pure equity or mortgage REITs, but they exist.

Within equity REITs, you will also see specialization by property type: residential (apartments), commercial (office), retail (shopping centers), industrial (warehouses), healthcare (hospitals and medical buildings), hospitality (hotels), and data centers. Each type has different economics and responds differently to economic conditions.

How REIT Dividends Work

When a REIT collects rent or mortgage interest, it subtracts operating costs — maintenance, property taxes, insurance, salaries for managers — and then distributes most of what remains to shareholders. That distribution is the dividend. If a REIT owns a $100 million apartment building that generates $8 million in annual rent, and operating costs are $3 million, the REIT has $5 million to distribute. If you own 1 percent of the REIT, you receive roughly $50,000 (before taxes).

Dividends are usually paid quarterly, though some REITs pay monthly. The amount can vary from quarter to quarter depending on how many units were rented, whether any major repairs were needed, or whether the REIT sold a property. Unlike a bond, which pays a fixed coupon, REIT dividends fluctuate.

The tax treatment matters: REIT dividends are taxed as ordinary income at your marginal tax rate, not as capital gains. If you are in the 24 percent federal tax bracket, a $1,000 REIT dividend costs you $240 in federal tax. A $1,000 long-term capital gain from a stock would cost you only $150 (at the 15 percent long-term rate). This is one reason REITs work better in tax-deferred accounts like IRAs or 401(k)s.

Why REITs Trade Like Stocks

Most REITs are listed on stock exchanges — the New York Stock Exchange or NASDAQ — just like Apple or Microsoft. You buy and sell shares during market hours at whatever price the market is willing to pay. This is very different from owning a rental property, where selling takes months and involves real estate agents, inspections, and negotiations.

Because REIT shares trade on an exchange, their price moves based on investor sentiment, interest rates, and economic conditions — not just on the underlying property values. A REIT that owns solid apartment buildings might fall 20 percent in a single month if investors panic about rising interest rates or a recession. The buildings themselves did not change, but the stock price did.

This liquidity is an advantage if you need to sell quickly. It is a disadvantage if you want stable, predictable returns. Real estate itself is illiquid — you cannot sell a building in an afternoon — but REIT shares give you real estate exposure with stock-market liquidity.

The Relationship Between Interest Rates and REIT Prices

REITs are sensitive to interest rate changes because investors compare REIT dividend yields to bond yields. When the Federal Reserve raises interest rates, newly issued bonds pay more. If a 10-year Treasury bond suddenly pays 5 percent and a REIT dividend yield is 3 percent, investors may sell REIT shares and buy bonds instead. REIT prices fall.

The opposite happens when rates fall. If bonds drop to 2 percent and REITs still pay 4 percent, REITs look attractive again, and prices rise. This dynamic means REIT prices often move inversely to interest rate expectations — they tend to fall when rates are rising and climb when rates are falling or expected to fall.

Mortgage REITs are especially sensitive to rate changes because their income depends directly on the interest rates they charge. Equity REITs are less sensitive but still affected because investors use interest rates as a benchmark for comparing returns across asset classes.

What Happens When a REIT Buys or Sells Property

REITs are constantly buying and selling properties as part of their business. When a REIT sells a property at a profit, that gain is passed through to shareholders and is taxable as a capital gain. When it buys a new property, it usually finances the purchase with debt or by issuing new shares.

If a REIT issues new shares to fund a purchase, existing shareholders' ownership percentage gets diluted — you own the same number of shares, but the company is now larger, so your slice is smaller. This is not necessarily bad if the new property is profitable, but it is a real effect to watch for.

Some REITs are very active traders of property; others hold buildings for decades. The more frequently a REIT buys and sells, the more capital gains you may owe in taxes, which is another reason REITs often work better in tax-deferred accounts.

The Risks of Owning REITs

REITs are not risk-free. If a REIT owns office buildings and office occupancy falls because companies shift to remote work, the REIT's rental income drops and so does the dividend. If a REIT owns retail properties and e-commerce reduces foot traffic, the same problem occurs. The underlying real estate can lose value or become less profitable.

Interest rate risk is real. Rising rates can hurt REIT prices even if the properties themselves are performing well. A recession can reduce occupancy across all property types and lower rents. A natural disaster can damage properties and force major repairs.

Leverage is another risk. Many REITs borrow money to buy properties, which magnifies both gains and losses. If a REIT borrows heavily and property values fall, the REIT may struggle to service its debt. If interest rates rise, the REIT's borrowing costs increase, which squeezes profit margins.

Frequently Asked Questions

Can I lose money owning a REIT?

Yes. REIT share prices fluctuate based on investor demand, interest rates, and economic conditions. You can buy at $50 and sell at $35, locking in a loss. The underlying properties can also decline in value or become less profitable, which reduces dividends. REITs are not may provide investments.

Do I have to hold a REIT for a certain amount of time?

No. You can buy and sell REIT shares whenever you want during market hours, just like any stock. There is no holding period requirement. However, if you sell within a short time, you may realize a capital loss or gain that affects your taxes.

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. The mutual fund gives you diversification across many REITs; owning a single REIT concentrates your exposure to one company's properties and management.

Are REIT dividends always paid in cash?

Usually, yes — you receive cash dividends in your brokerage account. Some REITs offer dividend reinvestment plans (DRIPs) that automatically buy new shares with your dividend instead of paying cash. You can typically choose which option you prefer.

Why would I own a REIT instead of buying rental property myself?

REITs require no down payment, no property management, no tenant screening, and no maintenance headaches. You can sell when ready if you need cash. Rental property requires significant capital upfront, ongoing work, and months to sell. REITs are simpler for most investors, though they offer less control and different tax treatment.