A REIT is a company that owns and operates income-producing real estate

A Real Estate Investment Trust (REIT) is a company that buys, owns, and manages real estate properties — office buildings, apartments, shopping centers, warehouses, hotels, or data centers — and then sells shares to investors. When you buy a share of a REIT, you own a piece of that real estate portfolio without having to buy property yourself or manage tenants.

The key difference between a REIT and a regular real estate company is that REITs are required by law to distribute at least 90 percent of their taxable income to shareholders as dividends. This means if you own REIT shares, you receive regular cash payments from the rent and other income the properties generate. That income requirement is what makes REITs different from other ways to invest in real estate.

REITs trade on stock exchanges just like regular company stock. You can buy and sell them through a brokerage account during market hours, which makes them much more liquid than owning physical property. You do not need a down payment, a mortgage, or a property manager.

Key Takeaways

  • A REIT is a company that owns real estate and sells shares to investors, allowing you to own a piece of property without buying it directly.
  • REITs must distribute at least 90 percent of their taxable income to shareholders as dividends, which is why they often pay regular cash payments.
  • You can buy and sell REIT shares through a brokerage account like you would buy stock, making them easier to trade than physical property.
  • Different REITs focus on different types of property — apartments, offices, shopping centers, hospitals, or data centers — so you can choose based on your interests.
  • REIT dividends are taxed as ordinary income, not as capital gains, which affects how much you keep after taxes.

How REITs generate income for shareholders

REITs make money the same way a landlord does: they collect rent from tenants. The company uses that rental income to pay operating costs, maintain the properties, and pay down any debt. Whatever is left over — the taxable income — must be distributed to shareholders as dividends.

The amount of dividend you receive depends on how many shares you own and how much income the REIT generates. A REIT that owns high-occupancy apartment buildings in strong markets will likely generate more income than one with vacant office space. Some REITs also make money by selling properties at a profit, though the core business is collecting rent.

You also benefit if the value of the underlying real estate increases. If a REIT's properties appreciate, the share price may rise, and you can sell your shares for more than you paid. This capital gain is separate from the dividend income you receive along the way.

Types of REITs and what they own

REITs specialize in different kinds of real estate, so you can choose based on what interests you or what you think will perform well. An apartment REIT owns residential buildings. An office REIT owns commercial office space. A retail REIT owns shopping centers and malls. A industrial REIT owns warehouses and distribution centers. A healthcare REIT owns hospitals, medical offices, and senior living facilities.

There are also data center REITs, which own the buildings that house computer servers and networking equipment. Hotel REITs own and operate lodging properties. Mortgage REITs are different — instead of owning property, they lend money to real estate developers and collect interest payments.

Some REITs are diversified, meaning they own multiple types of property across different regions. Others are focused, owning only one type of property in a specific market. The type you choose affects your risk and the income you receive.

Public REITs versus private REITs

A public REIT is listed on a stock exchange and trades like any other stock. You can buy shares through any brokerage account during market hours. Public REITs must file financial reports with the Securities and Exchange Commission (SEC) and meet strict disclosure rules, so the information about their holdings and performance is public and regularly updated.

A private REIT is not listed on an exchange. Shares are sold directly to investors, usually through financial advisors or investment firms, and you cannot easily sell them on the open market. Private REITs have fewer regulatory requirements and may hold properties for longer periods without the pressure to show quarterly profits. However, they are less transparent, and your money is less liquid — you may not be able to get it out quickly if you need it.

Most individual investors encounter public REITs because they are straightforward to buy and sell. Private REITs are typically available to wealthier investors or through retirement accounts.

Tax treatment of REIT dividends

REIT dividends are taxed as ordinary income, not as capital gains. This means they are taxed at your regular income tax rate, which is typically higher than the long-term capital gains rate. If you earn $50,000 a year and receive $5,000 in REIT dividends, that $5,000 is added to your taxable income and taxed at your ordinary income rate.

This is one of the main reasons people hold REITs in tax-advantaged accounts like IRAs or 401(k)s, where dividends are not taxed until you withdraw the money. In a regular taxable brokerage account, you owe taxes on the dividends every year, even if you reinvest them and do not take the cash out.

If you sell REIT shares for more than you paid, that profit is taxed as a capital gain. Long-term capital gains (shares held more than one year) are taxed at a lower rate than ordinary income in most cases.

Risks and downsides of REIT investing

REITs are not risk-free. The value of REIT shares fluctuates with the stock market. If the real estate market weakens, property values fall, or tenants stop paying rent, the REIT's income and share price can drop. During economic downturns, vacancy rates rise and rents fall, which directly reduces the income the REIT distributes to shareholders.

Interest rate changes also affect REITs. When interest rates rise, borrowing becomes more expensive for the REIT, which increases its costs. Higher rates also make bonds and savings accounts more attractive to investors, so they may sell REIT shares to chase higher yields elsewhere. This selling pressure can push REIT share prices down.

REITs are also sensitive to the specific real estate market they operate in. An apartment REIT in a city with declining population may struggle, while one in a growing city thrives. A retail REIT may suffer if e-commerce continues to reduce demand for physical stores. You are betting not just on real estate as a whole, but on the specific properties and markets the REIT owns.

How to buy REIT shares

To buy shares of a public REIT, you need a brokerage account — the same kind you would use to buy stock. Open an account with a broker like Fidelity, Charles Schwab, E-Trade, or any other firm that offers stock trading. Fund the account with cash, then search for the REIT by its ticker symbol and place an order to buy shares at the current market price.

You can also buy REITs through a mutual fund or exchange-traded fund (ETF) that holds multiple REITs. This gives you when ready diversification across many properties and REIT companies with a single purchase. REIT mutual funds and ETFs trade like stocks and can be bought through any brokerage account.

If you want to hold REITs in a tax-advantaged account, you can buy them inside an IRA or 401(k) the same way. Many employers offer REIT options in their 401(k) plan, and you can buy REITs in a traditional or Roth IRA through any brokerage that offers self-directed investing.

Frequently Asked Questions

Do I have to pay capital gains tax when I sell REIT shares?

Yes. If you sell REIT shares for more than you paid, the profit is a capital gain and is subject to tax. Long-term capital gains (shares held more than one year) are taxed at a lower rate than short-term gains. The tax rate depends on your income level and filing status.

Can I lose money investing in a REIT?

Yes. REIT share prices rise and fall with the stock market and the real estate market. If property values decline, vacancy rates rise, or the REIT takes on too much debt, the share price can drop and you can lose money. REITs are not may provide investments.

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

A REIT is a company that owns and operates real estate. A real estate mutual fund is a fund that holds shares of multiple REITs or real estate companies. A mutual fund gives you diversification across many REITs with one purchase, while buying individual REIT shares gives you more control over which properties you own a piece of.

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

No. You can buy a single share of a REIT for the price of one share, which may be anywhere from $20 to $200 or more depending on the REIT. You can also invest small amounts in a REIT mutual fund or ETF. There is no minimum investment beyond what your brokerage requires to open an account.

Are REITs a good investment for retirement?

REITs can be part of a retirement portfolio because they provide regular income through dividends. However, they are best held in tax-advantaged accounts like IRAs or 401(k)s because REIT dividends are taxed as ordinary income. Whether they are right for you depends on your age, risk tolerance, and overall investment goals.