A REIT is a company that owns real estate and pays you a share of the income it makes

A Real Estate Investment Trust (REIT) is a corporation that buys, owns, and manages real estate — apartment buildings, office towers, shopping centers, warehouses, hotels, or medical facilities. Instead of keeping all the money the properties earn, a REIT must distribute at least 90 percent of its taxable income to shareholders each year. When you own shares of a REIT, you own a piece of that income stream.

Think of it this way: owning a REIT is like owning a rental property without the work of being a landlord. You do not manage tenants, fix roofs, or handle evictions. You receive regular payments (usually quarterly) from the rent and other income the REIT collects. The trade-off is that you do not control which properties the REIT buys or how it manages them — a professional management team makes those decisions.

REITs exist because most people cannot afford to buy an office building or a 200-unit apartment complex outright. A REIT pools money from many investors, buys large properties, and lets each investor own a small piece. You can buy REIT shares through a brokerage account the same way you buy stock in any other company.

Key Takeaways

  • A REIT is a company that owns real estate and must distribute 90 percent of its taxable income to shareholders every year.
  • You can buy REIT shares through a brokerage account, and they trade on stock exchanges just like regular company stock.
  • REITs come in different types — some own apartments, others own offices, warehouses, or medical facilities — so you can choose where your money goes.
  • REIT dividends are taxed as ordinary income, not as capital gains, which means you may owe more tax on REIT income than on stock dividends.
  • A REIT's share price can rise or fall based on market conditions, even if the underlying properties are performing well.

How REIT income reaches you as a shareholder

When a REIT owns a property, tenants pay rent. The REIT collects that rent, pays the property's expenses (maintenance, property taxes, insurance, staff), and keeps what is left over as profit. By law, the REIT must send at least 90 percent of that profit to shareholders. Most REITs pay this out as a dividend — a regular cash payment, usually every three months.

The dividend amount depends on how much profit the REIT made and how many shares you own. If a REIT owns 50 apartment buildings and collects $100 million in rent in a year, and you own 0.001 percent of the REIT, you receive 0.001 percent of the dividend payout. The REIT's board of directors decides how much of the profit to distribute and how much to reinvest in new properties.

You also benefit if the REIT's share price rises. If you buy shares at $50 and the REIT's properties become more valuable or more profitable, the share price might climb to $60. You can sell your shares at that higher price and pocket the difference. This capital gain is separate from the dividend income.

The main types of REITs and what they own

REITs specialize in different kinds of real estate. An apartment REIT owns residential buildings and collects rent from tenants. An office REIT owns commercial office space and leases it to companies. A retail REIT owns shopping centers and strip malls. A industrial REIT owns warehouses and distribution centers. A healthcare REIT owns hospitals, nursing homes, and medical office buildings.

Some REITs own a mix of property types, while others focus on one. The type matters because different properties perform differently in different economic conditions. During a recession, office buildings may struggle while warehouses stay busy. When interest rates rise, apartment rents may stagnate while industrial properties thrive. By choosing which REIT to invest in, you are choosing which type of real estate you believe will perform well.

You can also buy a REIT index fund or mutual fund that holds shares in many different REITs at once. This spreads your money across different property types and different REIT companies, which reduces the risk that one REIT's poor performance will hurt you badly.

Why REIT dividends are taxed differently than stock dividends

When you receive a dividend from a regular company stock, it is often taxed at a lower rate — the capital gains rate — if you have held the stock for more than a year. REIT dividends are different. They are taxed as ordinary income, at the same rate as your salary or wages. This means you may owe significantly more tax on REIT income than on dividends from other stocks.

The reason is that REITs are required to distribute 90 percent of their taxable income, and that income comes from rent — which the IRS treats as ordinary business income, not investment income. If you are in a high tax bracket, REIT dividends can be expensive from a tax perspective. Many investors hold REITs in tax-advantaged retirement accounts like a 401(k) or IRA, where the dividends are not taxed until you withdraw the money.

When you sell REIT shares at a profit, that gain is taxed as a capital gain (at the lower rate if you held the shares for more than a year). Only the dividend payments themselves are taxed as ordinary income.

How REIT share prices move and what affects them

A REIT's share price is set by the market — buyers and sellers trading on a stock exchange. The price reflects what investors believe the REIT is worth, based on the income it generates, the quality of its properties, and broader economic conditions. A REIT that owns valuable properties in strong markets and has stable, long-term tenants will usually command a higher price than one with vacant buildings or struggling tenants.

Interest rates have a big effect on REIT prices. When the Federal Reserve raises interest rates, borrowing becomes more expensive. REITs often borrow money to buy new properties, so higher rates cut into their profits. Investors also have more attractive options — they can earn higher returns in bonds or savings accounts — so they may sell REIT shares and move their money elsewhere. When rates fall, the opposite happens: REITs become more attractive, and prices often rise.

Economic recessions also matter. If unemployment rises and people move less, apartment REITs may suffer as vacancy rates climb. If companies downsize and need less office space, office REITs struggle. Industrial and healthcare REITs tend to be more stable during downturns because warehouses and hospitals stay busy regardless of the economy.

Publicly traded REITs versus private REITs

A publicly traded REIT is listed on a stock exchange — the New York Stock Exchange or NASDAQ — and you can buy shares through any brokerage account. These REITs are regulated by the Securities and Exchange Commission (SEC) and must file regular financial reports. You can see the share price any trading day and sell your shares whenever you want. Most individual investors own publicly traded REITs.

A private REIT is not listed on an exchange. You cannot buy shares through a regular brokerage account. Private REITs are usually sold through financial advisors or directly by the REIT company, often with higher minimum investments ($25,000 or more). You cannot easily sell your shares — there is no public market for them. Private REITs are less regulated than public ones and may have higher fees. They are generally intended for wealthy investors or those with professional financial information.

For most people, publicly traded REITs are the practical choice because they are straightforward to buy, transparent, and liquid (you can sell whenever you want).

The risks of owning REIT shares

REIT shares can lose value. If interest rates rise sharply, REIT prices often fall because borrowing becomes expensive and investors move money to bonds. If the economy enters a recession and tenants cannot pay rent or move out, the REIT's income drops and the share price falls. If a REIT owns properties in a declining area, those properties may lose value over time.

REITs are also sensitive to real estate market conditions. If commercial real estate is overbuilt in your region and vacancy rates are high, office and retail REITs suffer. If apartment rents are falling because too many new units were built, apartment REITs see lower income. These are risks you take on when you invest in real estate, whether directly or through a REIT.

Concentration risk is another concern. If you own shares in only one REIT, you are betting on one company and one type of property. If that REIT makes a bad acquisition or its market weakens, you lose money. Spreading your REIT investment across different property types and different REIT companies reduces this risk.

How to buy REIT shares and where to hold them

To buy publicly traded REIT shares, you need a brokerage account — an account with a company like Fidelity, Vanguard, Charles Schwab, or any other broker. You can open an account online in minutes. Once your account is funded, you search for the REIT by its ticker symbol (a four-letter code like WELL for Welltower or AVB for AvalonBay Communities) and place an order to buy shares, just as you would buy any stock.

You can hold REIT shares in a regular taxable brokerage account, where you pay tax on dividends and capital gains each year. You can also hold them in a tax-advantaged account like a traditional IRA, Roth IRA, or 401(k), where the tax on dividends is deferred or eliminated. Because REIT dividends are taxed as ordinary income, holding them in a retirement account is often a smart move — it shields you from the higher tax bill.

REIT shares are also available through mutual funds and exchange-traded funds (ETFs), which bundle many REITs together. These are a good option if you want when ready diversification without picking individual REITs yourself.

Frequently Asked Questions

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

No. REIT shares trade on stock exchanges just like regular stock, so you can buy a single share for whatever the current price is — often between $50 and $150 per share. Some brokerages allow fractional share purchases, so you can invest even smaller amounts. You do not need a minimum investment like you might with a private REIT.

Can a REIT cut or stop paying dividends?

Yes. A REIT must distribute 90 percent of taxable income, but if the REIT's income falls — because tenants move out, properties lose value, or interest rates spike — the dividend shrinks. In severe downturns, some REITs have cut dividends significantly. This is why checking a REIT's dividend history and the stability of its tenants matters before you invest.

What is the difference between a REIT and owning rental property directly?

With a REIT, you own shares in a company; you do not own the actual property. You do not manage tenants, handle repairs, or deal with vacancies. You receive regular dividend payments and can sell your shares anytime. With direct ownership, you control the property but handle all the work and expense yourself. REITs are more liquid and require less effort; direct ownership gives you more control.

Are REITs a good investment during inflation?

REITs can be a hedge against inflation because rents tend to rise when inflation rises, which increases the REIT's income. However, rising inflation often leads the Federal Reserve to raise interest rates, which can hurt REIT prices in the short term. The relationship is complex and depends on which type of REIT you own and how quickly rates rise.

How do I know if a REIT is financially healthy?

Look at the REIT's financial reports, which are filed with the SEC and available on the REIT's website. Key metrics include the occupancy rate (what percentage of units are rented), the debt-to-equity ratio (how much the REIT borrows versus owns outright), and the dividend payout ratio (what percentage of income goes to dividends). A healthy REIT has high occupancy, manageable debt, and a sustainable dividend.