What a Real Estate Investment Trust Is

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. Instead of buying a building yourself, you buy shares in a REIT the way you'd buy stock in any other company. The REIT collects rent from tenants, collects mortgage payments from borrowers, or sells properties, then distributes most of that income to shareholders as dividends.

REITs exist because federal law created them in 1960 to let ordinary investors own real estate without buying property directly. A REIT must own real estate assets, must be structured as a corporation or trust, and must distribute at least 90 percent of its taxable income to shareholders each year. In exchange, the REIT itself pays no federal income tax — only the shareholders pay tax on the dividends they receive.

You don't need a large amount of money to start. You can buy a single share of a publicly traded REIT through a brokerage account the same way you'd buy a stock. You can also own REIT shares inside a retirement account like an IRA or 401(k).

Key Takeaways

  • A REIT is a company that owns or finances real estate and must distribute 90 percent of its taxable income to shareholders each year as dividends.
  • REITs own different types of property — apartments, office buildings, shopping centers, warehouses, hospitals, data centers — and you choose which type by picking which REIT to invest in.
  • You can buy shares of a publicly traded REIT through a brokerage account with as little money as the price of one share, or own REIT shares inside a retirement account.
  • REIT dividends are taxed as ordinary income in a regular brokerage account, not as capital gains, which affects how much you keep after taxes.
  • The value of your REIT shares can go up or down based on the real estate market, interest rates, and the REIT's performance, just like any stock.

The Three Types of REITs and What They Own

Equity REITs own the actual buildings and land. They collect rent from tenants and keep the difference between what they collect and what they spend on maintenance, property taxes, insurance, and debt payments. An equity REIT might own apartment complexes, office parks, shopping malls, warehouses, hotels, or medical office buildings. The REIT's income depends on how full the buildings are, how much rent it can charge, and how well it manages costs.

Mortgage REITs don't own buildings. Instead, they lend money to real estate owners and collect the interest payments. A mortgage REIT might hold a portfolio of mortgages on apartment buildings, commercial properties, or single-family homes. Their income comes from the interest borrowers pay, not from rent. Mortgage REITs are more sensitive to interest rate changes because when rates rise, new mortgages pay higher interest but existing mortgages in the REIT's portfolio become less valuable.

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

Within equity REITs, you can narrow down further. A REIT might specialize in residential (apartments), industrial (warehouses), retail (shopping centers), office, healthcare (hospitals and medical buildings), hospitality (hotels), or data centers. Some REITs own a mix of property types. The type of property a REIT owns affects how its income moves with the economy and how sensitive it is to interest rate changes.

How REIT Dividends Work and How They're Taxed

Because REITs must distribute 90 percent of taxable income to shareholders, most REITs pay dividends regularly — often quarterly. The dividend per share depends on how much income the REIT collected and how many shares are outstanding. If a REIT earns more, the dividend may rise; if it earns less, the dividend may fall.

When you own a REIT in a regular brokerage account (not a retirement account), the dividends you receive are taxed as ordinary income, not as capital gains. This means they're taxed at your regular income tax rate, which is usually higher than the capital gains rate. If you buy a REIT share for $50 and it rises to $60, that $10 gain is taxed as a capital gain. But if the REIT pays you a $2 dividend, that $2 is taxed as ordinary income. This tax treatment is one reason many investors hold REITs inside tax-advantaged retirement accounts like IRAs or 401(k)s, where dividends aren't taxed until you withdraw the money.

The dividend yield — the annual dividend divided by the share price — varies by REIT. Some REITs yield 3 percent, others 5 percent or higher. A higher yield can mean the REIT is paying out more income, or it can mean the share price has fallen and investors are demanding a higher return to compensate for the risk.

How REIT Share Prices Move

The price of a REIT share changes based on supply and demand, just like any stock. Several factors push that price up or down. If a REIT reports strong earnings and raises its dividend, the share price often rises. If it reports weak earnings or cuts its dividend, the price often falls. If interest rates rise, mortgage REITs usually fall in value because new mortgages become more attractive to lenders, making the REIT's existing mortgages worth less. Rising interest rates can also hurt equity REITs because higher borrowing costs reduce the REIT's profit margin.

The real estate market itself matters too. If commercial office space is in oversupply and rents are falling, an office REIT's share price will likely decline. If apartment demand is strong and rents are rising, a residential REIT's share price will likely rise. Economic recessions, changes in consumer behavior (like the shift to remote work), and local real estate conditions all affect REIT performance.

You can sell REIT shares whenever the market is open, the same way you'd sell any stock. If you bought at $50 and the price is now $60, you can sell and lock in the $10 gain. If the price has fallen to $40, you can sell and take the loss. This liquidity — the ability to convert your investment to cash quickly — is one advantage REITs have over owning property directly, where selling can take months.

Publicly Traded REITs Versus Non-Traded REITs

Publicly traded REITs are listed on stock exchanges like the NYSE or NASDAQ. You can buy and sell shares through any brokerage account during market hours. Their prices are public and change throughout the day. Most REIT investors own publicly traded REITs because they're transparent, liquid, and low-cost to buy.

Non-traded REITs are not listed on an exchange. They're sold through financial advisors and brokers, usually with a sales commission of 7 to 10 percent built into the price. You can't sell shares easily — you have to wait for the REIT to offer a redemption program or for the company to eventually go public or be sold. Non-traded REITs are less transparent because their prices aren't published daily. They're generally recommended only for investors with long time horizons and high risk tolerance who have already maxed out other investment options.

Most people starting out with REITs buy publicly traded shares through a brokerage account because the process is straightforward and the costs are clear.

REIT Performance and Risk Factors

REITs can provide income through dividends and potential growth through share price appreciation, but they also carry risks. A REIT's performance depends on the health of its properties, the strength of tenant demand, the ability to raise rents, and the cost of borrowing. If a REIT's major tenant goes out of business or a large number of tenants don't renew their leases, the REIT's income falls and the share price usually falls with it.

Interest rate risk affects both equity and mortgage REITs. When the Federal Reserve raises interest rates, borrowing becomes more expensive for REITs, which reduces profit margins. Higher rates also make bonds and other fixed-income investments more attractive relative to REITs, so investors may sell REIT shares to buy those alternatives. Conversely, when rates fall, REITs often become more attractive.

Economic recessions can hurt REITs significantly. During a recession, tenants may struggle to pay rent, retail stores may close, and office occupancy may fall. Different property types respond differently — residential REITs often hold up better than retail or office REITs during downturns because people still need housing. Mortgage REITs face the risk that borrowers will default on their loans.

Like any stock investment, REIT shares can be volatile. The share price can swing 20, 30, or 40 percent in a year depending on market conditions and the REIT's performance. If you need the money in the next few years, that volatility matters. If you have a longer time horizon, short-term price swings matter less.

How to Research and Compare REITs

Before buying REIT shares, you can research the company's financial statements, which are filed with the SEC and available on the SEC's EDGAR database and on the REIT's own website. Look at the REIT's funds from operations (FFO), which is similar to earnings but adjusted for real estate accounting. Look at the dividend yield and the payout ratio (what percentage of earnings the REIT distributes). Look at the occupancy rate — what percentage of the REIT's buildings are rented. Look at the debt level — how much the REIT has borrowed relative to the value of its assets.

Compare the REIT's performance to other REITs in the same sector. If one apartment REIT has a 5 percent yield and another has a 3 percent yield, understand why — is one riskier, or is one growing faster? Check the REIT's track record of raising or cutting its dividend. A REIT that has raised its dividend for 10 years straight shows consistent growth, while one that has cut its dividend recently may be facing headwinds.

You can also look at REIT index funds or exchange-traded funds (ETFs) that hold a basket of REITs. These spread your investment across many REITs and reduce the risk that any single REIT performs poorly. An index fund that tracks the entire REIT market or a specific sector (like residential or industrial) can be simpler than picking individual REITs.

Frequently Asked Questions

Can I lose money investing in a REIT?

Yes. REIT share prices can fall if the real estate market weakens, if interest rates rise, if the REIT cuts its dividend, or if the company's properties underperform. You could sell at a loss. However, if you hold the REIT long-term and collect dividends, the total return (dividends plus price appreciation) may still be positive even if the share price fluctuates.

Do I need a lot of money to buy REIT shares?

No. You can buy a single share of a publicly traded REIT through a brokerage account for the price of one share, which might be $50 to $150 depending on the REIT. Some brokerages also offer fractional shares, so you can invest even smaller amounts. You do need a brokerage account, which is free to open.

Are REITs better than owning rental property directly?

They're different. REITs offer liquidity (you can sell quickly), lower upfront costs, and professional management. Direct property ownership offers more control, potential tax deductions, and the ability to use leverage (borrowing) to amplify returns. The choice depends on your time, money, informed, and goals.

What's the difference between a REIT dividend and a stock dividend?

REIT dividends are taxed as ordinary income in a regular account, while stock dividends are often taxed as capital gains (which are usually taxed at a lower rate). REITs must distribute 90 percent of taxable income, so REIT dividends tend to be higher and more consistent than typical stock dividends. This is why many investors hold REITs in retirement accounts to avoid the ordinary income tax.

Can I hold REITs in a retirement account?

Yes. You can hold REIT shares in an IRA, Roth IRA, 401(k), or other retirement account. This is often a good strategy because REIT dividends are taxed as ordinary income, and retirement accounts defer or eliminate that tax. Check with your plan provider to confirm that REITs are available investment options in your specific account.