A REIT is a company that owns or finances income-producing real estate, and you can buy shares in it like a stock

A Real Estate Investment Trust (REIT) is a corporation that pools money from many investors to buy, own, or finance properties — apartments, office buildings, shopping centers, warehouses, hotels, or medical facilities. Instead of buying a building yourself, you buy shares of the REIT, and you own a piece of whatever properties it holds. The REIT collects rent from tenants, and by law must distribute at least 90 percent of its taxable income to shareholders as dividends.

REITs trade on stock exchanges the same way regular company stocks do, which means you can buy and sell shares through a brokerage account during market hours. You don't need a large amount of money to start — you can own a fraction of a share through most brokers. The REIT itself handles all the property management, tenant relations, maintenance, and repairs.

Key Takeaways

  • A REIT is a company that owns or finances real estate and must distribute 90 percent of its taxable income to shareholders as dividends.
  • You buy REIT shares through a brokerage account the same way you buy stock, and can sell them anytime the market is open.
  • REITs focus on specific property types — residential, commercial, industrial, healthcare, or a mix — so you choose based on what sectors interest you.
  • REIT dividends are taxed as ordinary income, not as capital gains, which affects how much you keep after taxes.
  • REITs can be publicly traded (listed on exchanges), publicly non-traded (sold directly by the company), or private (sold only to accredited investors).

How REITs generate income for shareholders

REITs make money in two ways: rent collected from tenants and appreciation if property values rise. When a REIT collects rent, it pays operating costs (property taxes, insurance, maintenance, staff salaries), and the remainder goes to shareholders as dividends. Most REITs pay dividends quarterly, though some pay monthly or annually depending on the company's structure.

If a REIT sells a property for more than it paid, that gain can also be distributed to shareholders, though this happens less often than regular rental income. The value of your REIT shares can also rise or fall based on market demand — if investors think the REIT will perform well, the share price goes up, and vice versa. This means you can make money two ways: from dividends and from selling shares at a higher price than you bought them.

The three types of REITs and how they differ

Publicly traded REITs are listed on major stock exchanges like the NYSE or NASDAQ. You buy and sell shares through any brokerage account, and the price changes throughout the trading day based on supply and demand. These are the most liquid — you can convert your shares to cash quickly — and the most transparent because they file regular reports with the Securities and Exchange Commission (SEC).

Publicly non-traded REITs are registered with the SEC but do not trade on an exchange. Instead, the company sells shares directly to investors, usually through financial advisors or brokers. These REITs are less liquid — it can take months or years to sell your shares, and there is no daily price quote. They often charge higher upfront fees (sometimes 10 to 15 percent of your investment) and may have longer lock-up periods before you can sell.

Private REITs are not registered with the SEC and are sold only to accredited investors (those meeting specific income or net worth thresholds set by the SEC). They are the least liquid and the least regulated, and information about their holdings and performance is not publicly available. Most individual investors do not have access to private REITs.

What property types REITs invest in

REITs specialize in different sectors, and the type of property a REIT owns affects its income stability and growth potential. Residential REITs own apartment buildings and single-family rental homes. Commercial REITs own office buildings, shopping centers, and retail spaces. Industrial REITs own warehouses and distribution centers. Healthcare REITs own hospitals, medical office buildings, and senior living facilities. Specialty REITs own data centers, cell towers, self-storage facilities, or other niche properties.

Some REITs are diversified, meaning they own multiple property types across different regions. Others are focused on a single sector or geographic area. A REIT focused on one property type can offer higher growth if that sector performs well, but carries more risk if that sector struggles. A diversified REIT spreads risk across multiple property types and locations.

How REIT dividends are taxed

REIT dividends are taxed as ordinary income, not as capital gains, which means they are taxed at your regular income tax rate rather than the lower long-term capital gains rate. If you are in the 24 percent tax bracket, a REIT dividend is taxed at 24 percent, whereas a stock dividend that qualifies as a long-term capital gain might be taxed at 15 percent. This is one of the largest differences between REIT investing and stock investing.

The tax treatment can change depending on what portion of the REIT's income comes from different sources. Some REITs may distribute a portion of their dividends as return of capital, which is not taxed as income but reduces your cost basis in the shares. You receive a Form 1099-DIV each year showing how much of your dividend is ordinary income, capital gains, or return of capital, so you can report it correctly on your tax return.

Risks and trade-offs of REIT investing

REITs are sensitive to interest rate changes. When the Federal Reserve raises interest rates, borrowing becomes more expensive for REITs, which reduces their profits and often causes REIT share prices to fall. Rising rates also make bonds and savings accounts more attractive to investors, so money flows away from REITs into those alternatives.

REITs are also affected by economic conditions in their specific sectors. A residential REIT performs well when housing demand is strong and rents are rising, but struggles during a housing downturn. A retail REIT can suffer if e-commerce growth reduces demand for physical stores. Economic recessions, job losses, and tenant bankruptcies can all reduce rental income and REIT valuations.

Publicly traded REITs are liquid and transparent, but non-traded and private REITs can lock your money away for years and charge high fees. If you need access to your cash, a non-traded REIT may not be the right choice. Diversified REITs offer lower risk but may have lower growth potential than focused REITs.

How REITs fit into a retirement or investment portfolio

REITs provide real estate exposure without the work of being a landlord. They generate regular income through dividends, which appeals to investors seeking cash flow. Because real estate often moves differently than stocks and bonds, REITs can add diversification to a portfolio — when stock prices fall, real estate values may hold steady or rise.

However, the high tax rate on REIT dividends makes them more tax-efficient inside a tax-advantaged account like a 401(k), IRA, or 403(b) than in a regular taxable brokerage account. If you hold REITs in a taxable account, you pay ordinary income tax on the dividends every year, which can reduce your after-tax returns. In a retirement account, the dividends grow tax-deferred or tax-free, depending on the account type.

Frequently Asked Questions

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

No. You can buy a single share of a publicly traded REIT through most brokers, and many brokers now allow fractional share purchases, so you can invest any amount. Non-traded and private REITs often have higher minimum investments, sometimes $1,000 to $25,000 or more, depending on the company.

Can I lose money in a REIT?

Yes. REIT share prices rise and fall based on market conditions, interest rates, and the performance of the properties the REIT owns. If you sell when the price is lower than what you paid, you lose money. Dividends can also be cut if the REIT's income falls. However, you cannot lose more than you invested.

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

A REIT is a company that owns or finances real estate directly. A real estate mutual fund is a fund that invests in multiple REITs or real estate companies. A mutual fund gives you diversification across many REITs in one purchase, while a single REIT gives you exposure to one company's specific properties.

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

REITs are generally more tax-efficient in a retirement account because REIT dividends are taxed as ordinary income. In a 401(k) or IRA, those dividends grow without annual tax, which preserves more of your money. In a taxable account, you pay income tax on dividends every year, which reduces your after-tax returns.

How often do REITs pay dividends?

Most REITs pay dividends quarterly, though some pay monthly or annually. The frequency varies by REIT. You can check the REIT's investor relations website or your brokerage account to see the dividend schedule and payment dates.