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

A Real Estate Investment Trust (REIT) is a corporation that buys, owns, and operates income-producing properties — apartment buildings, office towers, shopping centers, warehouses, hotels, or medical facilities. Instead of you buying a single building yourself, you buy shares in the REIT, and the company distributes most of the money it collects from rent and property sales to shareholders like you.

REITs exist because federal law created them in 1960 to let ordinary people invest in large real estate projects without needing millions of dollars. A REIT must own at least 75 percent of its assets in real property or mortgages, collect at least 75 percent of its income from real estate, and distribute at least 90 percent of its taxable income to shareholders each year. In exchange, the REIT itself pays no corporate income tax — the tax burden falls on you as the shareholder.

You buy REIT shares the same way you buy stock: through a brokerage account, either as individual shares or as part of a mutual fund or exchange-traded fund (ETF). The price of a REIT share moves up and down based on what investors think the properties are worth and whether the company is collecting enough rent to pay its dividends.

Key Takeaways

  • A REIT is a company that owns real estate and distributes most of its rental income to shareholders as dividends, which you receive regularly.
  • You buy REIT shares through a brokerage account the same way you buy any stock, and you can sell them whenever the market is open.
  • REITs must own at least 75 percent of their assets in real property and distribute at least 90 percent of taxable income to shareholders.
  • REIT dividends are taxed as ordinary income, not at the lower capital gains rate, so the tax bill can be larger than with other stock investments.
  • Different REITs own different property types — residential, commercial, industrial, healthcare — so you can choose which real estate sectors you want to own.

The three main types of REITs and what they own

Equity REITs own the physical properties themselves. When you buy shares in an equity REIT, you own a piece of the actual buildings, land, and tenants' leases. Your income comes from the rent the REIT collects. Most REITs are equity REITs.

Mortgage REITs do not own properties. Instead, they lend money to real estate developers and property owners, and they earn income from the interest on those loans. Your dividend comes from the interest payments borrowers make. Mortgage REITs are riskier because if a borrower stops paying, the REIT loses income.

Hybrid REITs do both — they own some properties and hold some mortgages. They are less common than the other two types.

Within equity REITs, companies specialize by property type. A residential REIT owns apartment buildings. A retail REIT owns shopping centers and strip malls. An industrial REIT owns warehouses and distribution centers. A healthcare REIT owns hospitals, medical office buildings, and nursing homes. A hotel REIT owns lodging properties. You can choose which sectors match your investment goals.

How REIT dividends work and when you receive them

REITs must distribute at least 90 percent of their taxable income to shareholders, and most distribute monthly or quarterly. When you own REIT shares, you receive a dividend check or electronic deposit on a schedule set by the company — often monthly, sometimes quarterly.

The dividend amount varies based on how much rent the REIT collected and how much it spent on maintenance, property taxes, and debt payments. If a REIT owns properties in a recession and tenants stop paying rent, the dividend shrinks. If the REIT sells a property at a profit or raises rents, the dividend may grow.

You can reinvest your dividends by buying more REIT shares, or you can take the cash. Many brokerages offer a dividend reinvestment plan (DRIP) that automatically buys new shares with your dividend money, which compounds your investment over time.

The tax treatment of REIT dividends and capital gains

REIT dividends are taxed as ordinary income, not as may have access to dividends. This matters because ordinary income is taxed at your regular tax bracket rate, which is usually higher than the preferential rate for may have access to stock dividends. If you are in the 24 percent tax bracket, a REIT dividend is taxed at 24 percent, whereas a may have access to dividend from a regular stock might be taxed at 15 percent.

When you sell REIT shares for more than you paid, the profit is a capital gain and is taxed at the capital gains rate — which is lower than ordinary income rates. But the dividend itself, which is the main reason most people own REITs, carries the ordinary income tax hit.

This makes REITs more tax-efficient to hold in retirement accounts like a 401(k) or IRA, where dividends and capital gains are not taxed until you withdraw the money. In a regular taxable brokerage account, the annual dividend tax can eat into your returns.

How REIT share prices move and what affects them

A REIT share price rises and falls based on two things: what investors think the properties are worth, and whether the REIT is collecting enough income to pay its dividend.

If interest rates rise, REIT prices often fall because investors can earn higher returns in bonds or savings accounts, making real estate less attractive. If a REIT's properties are in a hot market and rents are climbing, the share price usually rises. If a major tenant goes bankrupt and stops paying rent, the share price typically drops.

REIT share prices also move based on the overall stock market. During a broad market downturn, REIT shares often fall even if the properties themselves are performing well, because investors are selling stocks across the board.

The difference between public and private REITs

Public REITs are listed on stock exchanges like the New York Stock Exchange or NASDAQ. You can buy and sell shares during market hours, and the price changes throughout the day. Public REITs must file financial reports with the Securities and Exchange Commission (SEC), so you have transparent information about their properties and income.

Private REITs are not listed on an exchange. You cannot easily buy or sell shares, and they do not file public financial reports. Private REITs often require a large minimum investment and lock up your money for years. They are marketed mainly to wealthy investors and institutions.

Most individual investors own public REITs or REIT mutual funds and ETFs, which hold baskets of public REIT shares. These are liquid — you can sell them any trading day — and transparent.

Reasons people invest in REITs and the trade-offs

REITs offer real estate exposure without the work of being a landlord. You do not have to find tenants, fix leaky roofs, or deal with evictions. The REIT's professional management handles all of that.

REITs also offer diversification. One REIT might own 50 apartment buildings across five states. You get exposure to many properties and geographic areas with a single investment, which spreads your risk.

The dividend income is another draw. Many REITs pay 3 to 5 percent annual dividends, higher than the yield on most stocks. But remember that dividend is taxed as ordinary income, and the share price can fall if interest rates rise or the real estate market weakens.

The main trade-off is that you do not own the property itself — you own shares in a company that owns it. If the REIT makes poor decisions, overpays for properties, or takes on too much debt, your investment suffers. You also have no control over which properties the REIT buys or sells.

Frequently Asked Questions

Can I lose money investing in a REIT?

Yes. REIT share prices fall when interest rates rise, when the real estate market weakens, or when the REIT's tenants stop paying rent. You can also lose money if you sell shares for less than you paid. The dividend can be cut if the REIT's income drops.

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

No. You can buy a single share of a public REIT for the price of one share, which might be $50 to $150. REIT mutual funds and ETFs often have no minimum investment, or a minimum of $1,000 or less. Private REITs typically require $25,000 to $100,000 or more.

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

A REIT is a company that owns real estate. A real estate mutual fund is a basket of stocks that might include REIT shares, real estate company shares, and construction company shares. A mutual fund gives you broader exposure to the real estate sector, while a REIT gives you direct exposure to one company's properties.

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

Retirement accounts are usually better because REIT dividends are taxed as ordinary income. In a 401(k) or IRA, you avoid that annual tax hit. In a regular brokerage account, you pay ordinary income tax on the dividend every year, which reduces your returns.

How do I research a REIT before investing?

For public REITs, read the annual report (10-K) and quarterly reports (10-Q) filed with the SEC on the EDGAR database. Look at the dividend history, the types of properties owned, the occupancy rate (percentage of units rented), and the debt level. Compare the dividend yield and price-to-book ratio to other REITs in the same sector.