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

A Real Estate Investment Trust (REIT) is a corporation that buys, owns, and manages real estate properties — office buildings, apartments, shopping centers, warehouses, hotels, data centers — and distributes the income from those properties to people who own shares in the company. You buy shares like you would buy stock in any other company. The REIT collects rent from tenants, pays operating costs and debt service, and then passes most of what's left to shareholders as dividends.

The key difference from owning a rental property yourself is that you own a piece of many properties through one investment, you don't manage tenants or repairs, and the income comes as a dividend check rather than as rent you collect. REITs are required by law to distribute at least 90 percent of their taxable income to shareholders, which is why they tend to pay higher dividends than regular stocks.

Key Takeaways

  • REITs own and operate real estate properties and must distribute at least 90 percent of taxable income to shareholders as dividends.
  • You can buy REIT shares through a brokerage account the same way you buy any stock, and you can sell them whenever the market is open.
  • Different REITs focus on different property types — residential apartments, office space, retail, industrial warehouses, healthcare facilities, or a mix of several.
  • REIT dividends are taxed as ordinary income, not as capital gains, so the tax bill can be higher than with regular stock dividends.
  • REITs let you own real estate without the cash outlay, maintenance burden, or tenant management that comes with direct property ownership.

The types of properties REITs own

REITs specialize by property type. An apartment REIT owns residential rental buildings. An office REIT owns commercial office space leased to companies. A retail REIT owns shopping centers and standalone stores. An industrial REIT owns warehouses and distribution centers. A healthcare REIT owns medical office buildings, hospitals, and senior living facilities. A hotel REIT owns and operates hotels. A data center REIT owns the buildings that house computer servers.

Some REITs are diversified and own multiple property types. Others focus narrowly on one category. The property type matters because different sectors perform differently depending on the economy — apartment demand stays steady during recessions, while office space can suffer if companies downsize or let workers stay remote.

You can also find REITs that own specialty properties: cell phone towers, billboard space, storage units, or even timberland and farmland. The common thread is that the properties generate steady rental income, and the REIT passes that income to shareholders.

How you buy and sell REIT shares

You buy REIT shares through a brokerage account — the same account you would use to buy any stock. Open an account with a broker like Fidelity, Charles Schwab, E-Trade, or any other firm that offers stock trading. Search for the REIT by its ticker symbol, enter the number of shares you want, and place your order. The transaction settles in two business days, and the shares appear in your account.

You can sell REIT shares just as easily. Log into your brokerage, find the REIT in your holdings, enter the number of shares to sell, and submit the order. The cash lands in your account two business days later. Unlike real property, you don't need a real estate agent, you don't wait months for a sale to close, and you can sell during market hours whenever you want.

The price of REIT shares fluctuates daily based on supply and demand, just like any stock. If investors think a REIT's properties will generate more income, the share price rises. If they worry about vacancy rates or rising interest rates, the price falls. You might buy at one price and sell at a higher or lower price depending on market conditions.

How REIT dividends work and what they cost you in taxes

REITs must distribute at least 90 percent of their taxable income to shareholders. That income typically comes as a quarterly or monthly dividend — a payment per share that lands in your brokerage account. If a REIT pays a $1 dividend per share and you own 100 shares, you receive $100 that quarter.

The tax treatment of REIT dividends is less favorable than regular stock dividends. Most stock dividends may have access to for capital gains tax rates, which are lower. REIT dividends are taxed as ordinary income, at your regular tax bracket rate. If you are in the 24 percent tax bracket, a REIT dividend is taxed at 24 percent, not at the 15 or 20 percent capital gains rate. This is one reason REIT investing works better in tax-advantaged accounts like IRAs or 401(k)s, where dividends are not taxed until you withdraw the money.

You receive a Form 1099-DIV each January showing the dividends you received during the prior year. You report this on your tax return. Some REIT dividends may also include a return of capital, which is taxed differently — your broker will break this out on the 1099-DIV.

The difference between REITs and owning rental property directly

When you own a rental property, you collect rent, pay property taxes, insurance, maintenance, and repairs, manage tenants, handle evictions if needed, and deal with vacancies. You have a large cash outlay upfront, you are responsible for everything that breaks, and your money is tied up in one property in one location.

With a REIT, you own a fractional stake in many properties across different locations and property types. The REIT's professional management handles all tenant relations, maintenance, and operations. Your only job is to hold the shares and collect the dividend. You can sell your shares in minutes if you need cash. You do not need a down payment or a mortgage. The trade-off is that you have no control over which properties the REIT buys or how it manages them, and you cannot deduct mortgage interest or depreciation the way you can with direct property ownership.

How REITs make money and how that affects your returns

A REIT makes money from three sources: rental income from tenants, appreciation in property values, and sometimes from selling properties at a profit. The rental income is the most stable and predictable. A REIT collects rent, pays operating expenses (property taxes, insurance, maintenance, staff salaries), pays interest on debt, and distributes the remainder to shareholders.

Property appreciation — the increase in the value of the buildings themselves — can add to shareholder returns if the REIT sells a property for more than it paid or if the market value of its portfolio rises. However, REITs are required to distribute income, not capital gains, so appreciation is often reflected in the rising share price rather than in dividends.

Your total return as a REIT shareholder comes from two sources: the dividend you receive and any change in the share price. If you buy a REIT at $50 per share, receive $3 in annual dividends, and the share price rises to $55, your total return that year is $3 plus $5, or $8 on a $50 investment — about 16 percent. If the share price falls to $45, your return is $3 minus $5, or negative $2, even though you received the dividend.

Public REITs versus private REITs and non-traded REITs

A public REIT is listed on a stock exchange like the New York Stock Exchange or NASDAQ. You can buy and sell shares anytime during market hours through any brokerage. The share price is transparent and changes throughout the day. Examples include Realty Income, Prologis, and Welltower. Public REITs are regulated by the Securities and Exchange Commission and must file regular financial reports.

A private REIT is not listed on an exchange. Shares are sold directly to investors, usually through financial advisors or brokers, and you cannot easily sell them on the open market. Private REITs often have higher minimum investments and may charge higher fees. They are less transparent about pricing and performance.

A non-traded REIT is a hybrid — it is registered with the SEC but does not trade on an exchange. Shares are sold through brokers, but there is no secondary market to sell them into. You may be able to sell back to the REIT itself after a holding period, but the process is slow and the price may be discounted. Non-traded REITs often charge upfront sales commissions of 10 percent or more.

Risks and downsides of REIT investing

REIT share prices can be volatile. If interest rates rise, investors may shift money out of dividend-paying REITs and into bonds, causing REIT prices to fall. If the economy weakens and tenants cannot pay rent or vacate properties, REIT income and share prices can drop. A REIT focused on office space has faced headwinds as remote work reduced demand for commercial offices.

REITs carry interest rate risk. Many REITs borrow money to buy properties. When interest rates rise, the cost of refinancing debt increases, which reduces the income available to distribute to shareholders. Rising rates also make bonds more attractive relative to dividend-paying stocks, so investors sell REITs to buy bonds.

You have no control over management decisions. If the REIT's leadership makes poor acquisition choices, overpays for properties, or mismanages operations, your investment suffers. You can vote on the board of directors if you own shares, but individual shareholders rarely have meaningful influence.

Tax efficiency is lower than with regular stocks. REIT dividends are taxed as ordinary income, not capital gains. If you hold REITs in a taxable account, you pay taxes on dividends every year even if you do not sell the shares. This is why many investors hold REITs in IRAs or 401(k)s.

Frequently Asked Questions

Do I need a lot of money to start investing in REITs?

No. You can buy a single share of a public REIT through any brokerage for the current market price — often between $50 and $150 per share. Some brokerages also offer fractional shares, so you can invest any dollar amount. Private and non-traded REITs often require minimum investments of $1,000 to $25,000 or more.

Can I lose money investing in a REIT?

Yes. The share price can fall if interest rates rise, if the economy weakens, or if the REIT's properties underperform. You could sell at a loss. However, if you hold the shares long-term and collect dividends, the dividend income can offset price declines over time.

What happens if a REIT cuts its dividend?

If a REIT cuts its dividend, the share price typically falls because investors buy REITs largely for the dividend income. A dividend cut signals that the REIT's income has declined, which may reflect rising vacancies, lower rents, or higher expenses. You still own the shares, but the income you receive decreases.

Should I hold REITs in a regular brokerage account or in an IRA?

REITs work better in tax-advantaged accounts like IRAs or 401(k)s because REIT dividends are taxed as ordinary income. In an IRA, you pay no tax on the dividends until you withdraw money in retirement. In a taxable account, you owe taxes on every dividend every year, which reduces your after-tax return.

Can I use REIT dividends to live on?

Yes, if you own enough shares. Some investors buy REITs specifically for the steady dividend income. A REIT yielding 4 percent means you receive $4 per year for every $100 invested. If you own $100,000 in REITs yielding 4 percent, you receive $4,000 per year in dividends. However, remember that dividends are taxed as ordinary income and share prices can fluctuate.