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

A Real Estate Investment Trust (REIT) is a corporation that buys, manages, and sells properties — office buildings, apartments, shopping centers, warehouses, hotels, or data centers — and pays out at least 90 percent of its taxable income to shareholders as dividends. You own shares in the REIT itself, not the properties directly. The REIT's managers handle all the property operations, tenant relationships, and maintenance.

REITs trade on stock exchanges like regular company stock, which means you can buy and sell shares during market hours. Some REITs are publicly traded and highly liquid; others are private and harder to exit. The price of your shares moves based on market demand and the REIT's financial performance, separate from the actual value of the properties it owns.

The defining feature is the dividend requirement: by law, a REIT must distribute at least 90 percent of taxable income to shareholders each year. This is why REITs often pay higher dividends than typical stocks. In exchange for this distribution requirement, REITs pay no corporate income tax — the tax burden passes to you as a shareholder instead.

Key Takeaways

  • You own shares in a REIT company, not the real estate properties themselves, and the REIT's managers handle all property operations and decisions.
  • REITs must distribute at least 90 percent of taxable income to shareholders as dividends, which is why they typically pay higher dividend yields than other stocks.
  • Publicly traded REITs are bought and sold on stock exchanges during market hours, while private REITs have limited liquidity and longer holding periods.
  • 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 REIT types focus on different property sectors — residential, commercial, industrial, healthcare — so your exposure depends on which REIT you choose.

How REIT ownership differs from owning property directly

When you buy shares in a REIT, you are buying a fractional stake in a portfolio of properties, not a deed to a specific building. The REIT owns the properties outright or holds mortgages on them. You never deal with tenants, repairs, property taxes, or insurance — the REIT's management company does. This removes the day-to-day work of being a landlord.

Direct property ownership requires a large upfront capital investment, often a down payment of 20 to 25 percent of the purchase price plus closing costs. REIT shares cost far less per unit and can be purchased through any brokerage account. You can also sell REIT shares in minutes during market hours, whereas selling a physical property takes months and involves realtor fees, inspections, and appraisals.

The trade-off is control. As a direct property owner, you decide when to buy, sell, renovate, or raise rents. As a REIT shareholder, you have no say in those decisions — the REIT's board and management team make them. You benefit or suffer from their choices, but you cannot override them.

Types of REITs and what properties they hold

REITs are organized by the type of real estate they focus on. Residential REITs own apartment buildings, single-family rentals, or manufactured housing communities. Commercial REITs own office buildings, shopping centers, and retail spaces. Industrial REITs own warehouses, distribution centers, and logistics facilities. Healthcare REITs own hospitals, medical office buildings, senior living facilities, and nursing homes.

Other categories include hotel REITs (which own and operate lodging properties), data center REITs (which own facilities that house computer servers), and specialty REITs (which own cell towers, billboards, or self-storage units). Some REITs are diversified and own multiple property types; others focus on a single sector.

Your choice of REIT determines your exposure to different economic cycles. Residential REITs perform differently than office REITs during recessions. Industrial REITs benefit from e-commerce growth. Healthcare REITs are tied to aging demographics and healthcare spending. Understanding what a REIT owns helps you see how it fits into your overall portfolio.

How REIT dividends are taxed

REIT dividends are taxed as ordinary income, not as capital gains, regardless of how long you hold the shares. This means they are taxed at your regular income tax rate — which can be as high as 37 percent at the federal level, depending on your tax bracket. This is different from stock dividends, which often may have access to for lower capital gains rates.

The tax treatment depends on the source of the REIT's income. Dividends paid from ordinary income are taxed at your ordinary rate. Dividends paid from capital gains may be taxed as capital gains. Dividends paid from return of capital (a return of your own investment) are not when ready taxable but reduce your cost basis in the shares, meaning you pay tax later when you sell.

REITs held in tax-advantaged accounts like 401(k)s or IRAs avoid this when ready tax burden. Many investors hold REITs in retirement accounts specifically to defer the ordinary income tax. In taxable accounts, the high dividend yield of a REIT can create a large annual tax bill, so understanding your tax situation before buying is important.

Publicly traded versus private REITs

Publicly traded REITs are listed on major stock exchanges — the New York Stock Exchange or NASDAQ — and trade like regular stocks. You can buy and sell shares during market hours at the current market price. Prices fluctuate based on supply and demand. Publicly traded REITs must file regular financial reports with the Securities and Exchange Commission (SEC) and meet strict disclosure requirements.

Private REITs are not listed on public exchanges and are sold directly to investors, often through financial advisors or broker-dealers. They have no daily market price. Instead, the REIT itself sets a price per share, usually based on an annual appraisal of the properties. Private REITs typically require a higher minimum investment — often $25,000 to $50,000 or more — and lock up your money for years. Redemptions (selling your shares back to the REIT) are limited and may take months to process.

Publicly traded REITs offer liquidity and transparency but expose you to stock market volatility. Private REITs offer potentially steadier returns but less flexibility and higher fees. The choice depends on how long you can tie up money and how much price fluctuation you can tolerate.

REIT performance and risk factors

REIT returns come from two sources: dividend income and share price appreciation. The dividend is relatively predictable because of the 90 percent distribution requirement. The share price, however, moves with market sentiment, interest rates, and the REIT's operational performance. When interest rates rise, REIT share prices often fall because investors can earn higher returns elsewhere. When property values or rents rise, REIT share prices typically climb.

REITs are sensitive to economic cycles. Residential REITs may struggle during recessions when unemployment rises and renters default. Office REITs have faced headwinds as remote work reduces demand for commercial space. Industrial REITs have benefited from e-commerce growth. Healthcare REITs depend on occupancy rates and government reimbursement rates. Your REIT's performance depends heavily on its sector and the broader economy.

Interest rate changes affect REITs directly and indirectly. REITs often use debt to finance property purchases, so rising rates increase their borrowing costs and reduce profitability. Rising rates also make bonds and savings accounts more attractive to investors, which can reduce demand for REIT shares. Conversely, falling rates can boost REIT valuations and make their dividends more attractive relative to other fixed-income options.

How to evaluate a REIT before investing

Start by understanding what the REIT owns and where those properties are located. Read the REIT's annual report (Form 10-K filed with the SEC for public REITs) to see the breakdown of properties, occupancy rates, and tenant quality. A REIT with a few large tenants is riskier than one with many small tenants, because losing one major tenant hurts more.

Look at the REIT's funds from operations (FFO), a metric specific to real estate that adjusts net income for depreciation and other non-cash items. FFO is a better measure of a REIT's true earning power than standard net income. Compare the dividend payout to FFO — if the REIT is paying out more than it earns, the dividend may not be sustainable.

Check the REIT's debt level and interest coverage ratio. High debt increases risk, especially if interest rates rise. Look at historical dividend payments to see if the REIT has cut dividends during downturns. Review the management team's track record and compensation structure. Finally, compare the REIT's valuation — its price relative to FFO or net asset value — to similar REITs to see if it is fairly priced.

Frequently Asked Questions

Can I lose money investing in a REIT?

Yes. REIT share prices fluctuate based on market conditions, interest rates, and the REIT's performance. If you sell when the price is lower than what you paid, you realize a loss. Additionally, if a REIT cuts its dividend due to financial stress, the share price often falls. REITs are not may provide investments.

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

Publicly traded REITs have no holding period — you can sell anytime during market hours. Private REITs often have long lock-up periods, sometimes 7 to 10 years, and redemptions are restricted. Check the REIT's prospectus before investing to understand any restrictions on selling.

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

A REIT is a company that owns and operates real estate directly. A real estate mutual fund is a pool of money that invests in REIT shares, real estate companies, or both. A mutual fund gives you diversification across multiple REITs but adds an extra layer of fees. A REIT gives you direct exposure to a specific real estate portfolio.

How much of my portfolio should be in REITs?

That depends on your goals, risk tolerance, and time horizon. REITs are often used as a diversification tool because they behave differently than stocks and bonds. Some investors allocate 5 to 15 percent of their portfolio to real estate. Others use none. Your allocation should reflect your overall investment strategy and financial situation.

Are REITs a good hedge against inflation?

REITs can provide some inflation protection because property values and rents often rise with inflation. However, REITs are not a perfect hedge — they can underperform during periods of rising interest rates, which often accompany inflation. REITs work best as part of a diversified portfolio rather than as a standalone inflation hedge.