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 — apartment buildings, shopping centers, office towers, warehouses, hotels, or medical facilities. When you buy shares of a REIT, you own a piece of that property portfolio without having to buy a building yourself, manage tenants, or handle repairs.

The key difference between a REIT and owning rental property directly is liquidity and scale. You can sell REIT shares during market hours like any stock. A REIT might own hundreds of properties across multiple states or countries; you get exposure to that diversification with a single purchase. The REIT's professional managers handle tenant relations, maintenance, and leasing.

REITs are required by law to distribute at least 90 percent of their taxable income to shareholders as dividends. That means most of the money the properties generate — rent payments, lease fees, financing income — flows back to you as a regular payment, usually quarterly. This is why many investors use REITs for income rather than growth.

Key Takeaways

  • A REIT is a company that owns or finances real estate and distributes most of its income to shareholders as dividends, typically paid quarterly.
  • You buy REIT shares through a brokerage account the same way you buy stock, and you can sell them any trading day without waiting for a buyer.
  • REITs must own properties that generate income — residential rentals, commercial leases, or mortgages — and cannot be primarily development or land-holding companies.
  • REIT dividends are taxed as ordinary income, not capital gains, so the tax treatment differs from stock dividends and depends on your income bracket.
  • Different REITs focus on different property types, so you can choose based on whether you want exposure to apartments, offices, retail, or industrial warehouses.

The legal requirements that make a REIT a REIT

Not every real estate company is a REIT. The IRS has strict rules about what qualifies. A REIT must be a corporation, trust, or association that is taxed as a corporation. It must have at least 100 shareholders and be structured so that no five shareholders own more than 50 percent of the shares — this prevents one person from controlling it like a private business.

The REIT must invest at least 75 percent of its assets in real estate, mortgages, or cash. At least 75 percent of its gross income must come from rents, mortgage interest, or property sales. And it must distribute at least 90 percent of its taxable income to shareholders each year. In exchange for meeting these rules, the REIT itself pays no federal income tax — only the shareholders pay tax on the dividends they receive.

This structure exists because Congress wanted to let ordinary investors own real estate without the tax burden of owning property directly. Before REITs existed in 1960, you had to be wealthy enough to buy buildings outright or form a partnership with other investors.

How REIT dividends work and what you actually receive

When a REIT collects rent from its tenants, it uses some money to pay property taxes, insurance, maintenance, and staff salaries. The remainder — the net income — is distributed to shareholders. Most REITs pay dividends quarterly, though some pay monthly or annually. The amount per share varies based on how much income the properties generated that quarter.

A REIT might pay a dividend of $0.50 per share each quarter, which means if you own 100 shares, you receive $50 that quarter. Some REITs have raised their dividends year after year, similar to how a growing company might increase stock dividends. Others cut dividends during downturns — for example, many hotel and retail REITs cut dividends sharply in 2020 when properties sat empty during lockdowns.

The dividend arrives as cash in your brokerage account, and you can reinvest it to buy more shares, spend it, or hold it. Unlike stock dividends, which often may have access to for lower capital gains tax rates, REIT dividends are taxed as ordinary income at your regular tax bracket. If you earn $60,000 a year and receive $2,000 in REIT dividends, you report that $62,000 as income.

The main types of REITs and what properties they own

REITs are often grouped by the type of property they focus on. Residential REITs own apartment buildings and single-family rental homes. Commercial REITs own office buildings and shopping centers. Industrial REITs own warehouses and distribution centers — a category that has grown as online shopping increased demand for logistics space. Healthcare REITs own hospitals, medical office buildings, and senior living facilities.

There are also mortgage REITs, which do not own properties but instead lend money to real estate developers and owners. They earn income from the interest on those loans rather than from rent. Mortgage REITs tend to be more sensitive to interest rate changes than property-owning REITs.

Some REITs are diversified, owning multiple property types across different regions. Others are specialized, focusing on a single property type or geography. A specialized REIT might own only data centers, or only properties in the Southwest. Diversified REITs spread risk across more property types; specialized REITs offer more focused exposure if you believe one sector will outperform.

How to buy REIT shares and what to watch for

You buy REIT shares through a brokerage account — the same account you would use to buy stock in Apple or Microsoft. You can open an account at firms like Fidelity, Charles Schwab, E-Trade, or many others. Search for the REIT by its ticker symbol (for example, SPG for Simon Property Group, a major retail REIT), enter the number of shares you want, and place the order during market hours.

REIT shares trade on major exchanges like the New York Stock Exchange and NASDAQ, so prices fluctuate throughout the day based on supply and demand. You can sell your shares any trading day without waiting for a buyer — the exchange matches you when ready. This liquidity is one reason REITs appeal to investors who want real estate exposure but do not want to wait months to sell a physical building.

When evaluating a REIT, look at its dividend yield (the annual dividend divided by the share price), its occupancy rate (what percentage of its properties are leased), and its debt level. A REIT with very high debt may struggle if interest rates rise or if tenants stop paying rent. Compare the REIT's dividend yield to other REITs in the same sector and to other income investments like bonds. A yield that looks too high might signal that the market expects the dividend to be cut.

Tax treatment of REIT dividends and capital gains

REIT dividends are taxed differently than stock dividends. When you receive a dividend from a regular corporation, it may may have access to as a "may have access to dividend" taxed at capital gains rates — 0, 15, or 20 percent depending on your income. REIT dividends are almost always taxed as ordinary income at your full tax bracket, which can be as high as 37 percent for high earners.

This matters most if you hold REITs in a taxable brokerage account. If you hold them in a retirement account like an IRA or 401(k), the tax on dividends is deferred or eliminated, so the tax treatment does not affect you until you withdraw. Many investors use REITs primarily in retirement accounts for this reason.

When you sell REIT shares for more than you paid, you owe capital gains tax on the profit. If you held the shares for more than one year, it is a long-term capital gain taxed at the lower rates. If you held them for one year or less, it is a short-term capital gain taxed as ordinary income. Some REITs also return a portion of your original investment as a return of capital, which is not taxed when ready but reduces your cost basis — the amount you subtract from the sale price when calculating your gain.

How REIT performance compares to owning property directly

Owning a rental property and owning a REIT are different investments with different trade-offs. A rental property gives you control — you choose the tenant, set the rent, and decide when to sell. You can use leverage (a mortgage) to amplify returns. You can deduct mortgage interest, property taxes, repairs, and depreciation on your taxes, which can reduce your taxable income significantly. But you also handle tenant disputes, vacancies, and emergency repairs yourself or pay a property manager to do it.

A REIT gives you liquidity, diversification, and professional management. You do not have to find tenants or fix a broken roof. You can sell your shares in minutes if you need cash. But you have no control over which properties the REIT buys or how it operates them. You cannot deduct losses the way you can with direct ownership. And your returns depend entirely on the REIT's management decisions and the market price of the shares.

Over long periods, REIT returns have historically been comparable to direct real estate ownership, though with more volatility because share prices fluctuate daily. A REIT is better suited to investors who want real estate exposure without the time commitment or capital required to buy and manage a building.

Frequently Asked Questions

Can I lose money investing in a REIT?

Yes. REIT share prices rise and fall based on market demand, interest rates, and the REIT's financial performance. If you buy shares at $50 and the price drops to $35, you have a loss. REITs can also cut dividends if properties underperform or if the REIT takes on too much debt. You could lose both principal and income.

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

No. You can buy a single share of most REITs for anywhere from $20 to $200, depending on the REIT. Some brokerages also offer fractional shares, so you can invest any dollar amount. This makes REITs accessible to small investors in a way that buying a rental property is not.

What happens to my REIT dividends if the company cuts them?

You stop receiving the dividend amount you were getting. If a REIT cuts its dividend from $2 per share per year to $1, you receive half as much income. The share price often falls when a dividend is cut because income-focused investors sell. You can hold the shares hoping the dividend is restored, or sell and move the money elsewhere.

Are REITs a good investment for retirement accounts?

REITs can work well in retirement accounts because the tax on dividends is deferred or eliminated, avoiding the ordinary income tax that applies in taxable accounts. Many financial advisors suggest using REITs in IRAs or 401(k)s and holding other investments in taxable accounts for tax efficiency.

How do I know if a REIT is financially healthy?

Look at the REIT's occupancy rate (the percentage of properties that are leased), its debt-to-assets ratio, and whether it has raised or cut its dividend over the past few years. Read the quarterly earnings report or investor presentation on the REIT's website. A healthy REIT typically has occupancy above 90 percent, manageable debt, and stable or growing dividends.