How you actually buy a REIT

You buy a REIT the same way you buy a stock: through a brokerage account. Open an account with a broker (Fidelity, Charles Schwab, Vanguard, E-Trade, or dozens of others), fund it with cash, search for the REIT by its ticker symbol, and place a buy order for the number of shares you want. The transaction settles in two business days, and you own the shares outright.

You do not need a real estate license, a down payment, a mortgage, or a property inspection. You need only the cash to buy the shares at their current market price. If a REIT is trading at $50 per share and you have $5,000, you can buy 100 shares. The price moves during market hours just like any stock price does.

Some brokers charge a commission per trade; others charge none. Check your broker's fee schedule before you open an account, because the cost of buying and selling can add up if you trade frequently. If you plan to hold for years, the fee matters less.

Key Takeaways

  • You buy REITs through a brokerage account using the same process as buying stock, with no real estate license or property inspection required.
  • REIT shares trade during market hours at prices that change throughout the day, so the cost per share when you buy may differ from the price you saw yesterday.
  • Most REITs distribute at least 90 percent of their taxable income to shareholders as dividends, which you receive in cash or can reinvest automatically.
  • REIT dividends are taxed as ordinary income in the year you receive them, not at the lower capital gains rate, even if you hold the shares for years.
  • You can sell your REIT shares anytime the market is open, so your money is not locked in the way it would be in a rental property or a long-term CD.

Choosing between public and non-traded REITs

A public REIT trades on a stock exchange (Nasdaq, NYSE) during market hours. You can buy and sell shares when ready at the price the market sets that moment. Thousands of public REITs exist, covering apartment buildings, office parks, shopping centers, data centers, hospitals, and storage facilities. You can research them using the same tools you use for stocks: financial websites, analyst reports, and the REIT's own investor relations page.

A non-traded REIT does not trade on an exchange. You buy shares directly from the REIT sponsor, usually through a financial advisor or broker. The price is set by the sponsor, not by market demand. You cannot sell the shares back easily; most non-traded REITs have a holding period of five to ten years, and some charge a redemption fee if you exit early. Non-traded REITs are less transparent than public ones because they report less frequently and to fewer regulators.

For most people starting out, a public REIT is simpler: you can research it, buy it in minutes, and sell it whenever you want. Non-traded REITs carry higher fees, longer lock-in periods, and less public information. They are marketed heavily to people with large sums to invest, but the structure favors the sponsor more than the investor.

Understanding REIT dividends and how they are taxed

REITs are required by law to distribute at least 90 percent of their taxable income to shareholders as dividends. This is why REIT dividends tend to be higher than stock dividends. If a REIT earns $100 million and has 10 million shares outstanding, it must pay out at least $90 million, or $9 per share, to shareholders. The exact amount varies by REIT and by year.

You receive dividends in cash, usually quarterly. Many brokers let you set up dividend reinvestment, which automatically buys new shares with the dividend money instead of sending it to your account. This compounds your holding over time without you having to place new buy orders.

The tax treatment is important: REIT dividends are taxed as ordinary income, not as capital gains. If you earn $1,000 in REIT dividends and you are in the 24 percent tax bracket, you owe $240 in federal tax on that income. This is true even if you held the shares for ten years. Capital gains on stocks held over a year are taxed at a lower rate (0, 15, or 20 percent depending on income). REIT dividends do not get that break. This makes REITs less tax-efficient than stocks if you hold them in a regular taxable account. In a tax-deferred account like an IRA or 401(k), the tax treatment does not matter because you do not pay tax until you withdraw.

Comparing REIT funds to individual REIT shares

You can also own REITs indirectly through a mutual fund or exchange-traded fund (ETF) that holds many REITs. A REIT fund spreads your money across dozens or hundreds of properties and REIT companies, so you are not betting on a single REIT's performance. The fund manager handles the buying and selling of individual REITs inside the fund.

REIT funds charge an annual expense ratio — a percentage of your investment that goes to the fund company each year. A low-cost REIT ETF might charge 0.08 percent annually; an actively managed REIT mutual fund might charge 0.50 to 1.00 percent or more. Over decades, that difference compounds. A REIT fund also pays dividends, and those dividends are taxed the same way as individual REIT dividends.

The trade-off is simplicity versus control. Buying individual REIT shares lets you pick specific properties and companies you believe in, but requires research and active management. A REIT fund requires less work and spreads risk, but you have no say in which REITs the fund holds.

What happens when you sell REIT shares

When you sell REIT shares, you owe capital gains tax on the profit (or can claim a loss if the price fell). If you bought 100 shares at $50 each ($5,000 total) and sold them at $60 each ($6,000 total), your capital gain is $1,000. If you held the shares for more than one year, that gain is taxed at the long-term capital gains rate. If you held them for one year or less, it is taxed as ordinary income.

The sale itself is when ready: you place a sell order during market hours, and the cash lands in your brokerage account two business days later. You can then withdraw the cash to your bank account or use it to buy other investments. There is no waiting period, no approval process, and no penalty for selling early the way there might be with a CD or a bond.

Keep records of what you paid for the shares (your cost basis) and when you bought them. Your broker tracks this, but you will need it for your tax return. If you reinvested dividends, each reinvestment counts as a separate purchase at a different price, which affects your cost basis when you sell.

Opening a brokerage account and funding it

Choose a broker and visit their website. Most brokers let you open an account online in 10 to 15 minutes. You will need your Social Security number, a government ID, your address, and your employment information. Some brokers ask for your annual income or net worth, but this is usually just for their records.

After your account is approved (usually the same day or next business day), you fund it by linking a bank account or transferring money from another investment account. The money typically arrives within one to three business days. Once it is in your brokerage account, you can buy REITs or any other securities the broker offers.

If you are buying REITs inside a retirement account (a traditional IRA, Roth IRA, or SEP-IRA), the process is the same, but the account type determines the tax treatment. Contributions to a traditional IRA may be tax-deductible; Roth IRA contributions are not, but withdrawals in retirement are tax-free. Consult a tax professional about which account type makes sense for your situation.

Researching individual REITs before you buy

Before you buy shares, read the REIT's annual report (called a 10-K) and quarterly reports (called 10-Qs). These are filed with the Securities and Exchange Commission and are free to read from the SEC's website (sec.gov) or from the REIT's investor relations page. The 10-K tells you what properties the REIT owns, how much debt it carries, what the dividend has been, and what management expects going forward.

Look at the REIT's funds from operations (FFO), which is a measure of cash flow specific to REITs. It is not the same as net income. A REIT can be profitable on paper but have weak FFO, which means it may struggle to pay dividends. Compare the dividend per share to the FFO per share; if the dividend is much higher than FFO, the REIT may be unsustainable.

Check the REIT's debt level. REITs use leverage (borrowed money) to buy properties, which is normal. But if debt is very high relative to the value of the properties, the REIT is at risk if interest rates rise or if property values fall. Look at the debt-to-assets ratio in the 10-K.

Read analyst reports from financial websites and brokerage firms. These are often free. They summarize the REIT's strengths, weaknesses, and outlook. Do not treat them as gospel, but they are a starting point for understanding what you are buying.

Frequently Asked Questions

Can I buy a REIT with a small amount of money?

Yes. If a REIT share costs $50 and you have $500, you can buy 10 shares. There is no minimum investment for individual REIT shares, though some brokers may require a minimum account balance (often $0 to $500). REIT funds sometimes have minimums of $1,000 or $2,500, but many brokers waive the minimum if you set up automatic monthly contributions.

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

No. You can sell public REIT shares anytime the market is open. There is no holding period, no penalty, and no lock-in. Non-traded REITs, by contrast, often have holding periods of five to ten years and redemption fees if you exit early. Always check the prospectus before you buy a non-traded REIT.

What if a REIT cuts its dividend?

The share price usually falls when a REIT cuts its dividend, because investors buy REITs partly for the income. If you need the dividend income, a cut is painful. If you are holding for long-term growth, a cut may be temporary and the price may recover. Check the REIT's 10-Q to understand why the dividend was cut before you decide to sell or hold.

Can I lose money on a REIT?

Yes. REIT share prices move up and down based on market demand, interest rates, and the REIT's performance. If you buy at $60 and the price falls to $40, you have a loss. If you sell at $40, you lock in that loss. If you hold, the price may recover or may fall further. REITs are not may provide investments.

Should I buy individual REITs or a REIT fund?

Individual REITs give you control and let you focus on properties you understand. REIT funds spread risk across many REITs and require less research. If you have time and interest in real estate, individual REITs may suit you. If you want simplicity and diversification, a REIT fund is often the better choice. Many investors do both.