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

A REIT (Real Estate Investment Trust) is a company that buys, owns, and manages real estate properties — apartments, office buildings, shopping centers, warehouses, hotels — and then distributes the income from those properties to people who own shares in the company. You own a piece of the REIT; the REIT owns the real estate; tenants pay rent to the REIT; and the REIT passes most of that rental income to you as a shareholder.

The core idea is straightforward: instead of buying an apartment building yourself, you buy shares in a company that owns many buildings. You get a portion of the rent without the work of being a landlord. The REIT handles maintenance, tenant disputes, property taxes, and insurance. You receive regular distributions — usually quarterly — based on how much profit the REIT made.

REITs are required by law to distribute at least 90 percent of their taxable income to shareholders each year. That is why REIT distributions tend to be higher than dividends from other stocks. In exchange, REITs pay no corporate income tax on the money they distribute — the tax burden falls on you as the shareholder instead.

Key Takeaways

  • A REIT is a company that owns real estate and distributes rental income to shareholders, letting you own real estate indirectly without being a landlord.
  • REITs must distribute at least 90 percent of taxable income to shareholders, which is why their payouts are typically higher than stock dividends.
  • You can buy REIT shares through a regular brokerage account the same way you buy any stock, and they trade on major exchanges.
  • REIT distributions are taxed as ordinary income, not capital gains, so the tax bill can be larger than dividends from regular stocks.
  • Different REITs own different property types — residential, commercial, industrial, healthcare — so you can choose which real estate sector you want exposure to.

How REIT shares work as an investment

When you buy shares of a REIT, you own a fractional stake in all the properties that REIT owns. If the REIT owns 50 apartment buildings and you own 0.001 percent of the company, you own a tiny piece of all 50 buildings. You do not own any single building outright; you own a claim on the income those buildings generate.

REIT shares trade on stock exchanges — the New York Stock Exchange, NASDAQ, and others — just like regular company stock. You buy and sell them through a brokerage account. The price of a REIT share moves up and down based on investor demand, interest rates, and the real estate market, separate from the actual value of the properties the REIT owns.

Most REITs pay distributions quarterly. The amount varies depending on how much rent the REIT collected, how much it spent on maintenance and debt, and how much it chose to reinvest in new properties. A REIT that owns high-quality properties in strong markets typically pays more than one that owns struggling properties.

Different types of REITs and what they own

REITs specialize in different kinds of real estate. A residential REIT owns apartment buildings and single-family rental homes. A commercial REIT owns office buildings and retail space. An industrial REIT owns warehouses and distribution centers. A healthcare REIT owns hospitals, nursing homes, and medical office buildings. A hotel REIT owns and operates hotels.

Some REITs are diversified and own multiple property types. Others focus on a single type or even a single geographic region. The type of property matters because different sectors perform differently depending on economic conditions. During a recession, office buildings may struggle while warehouses thrive. During a boom, retail may do well.

You can also find mortgage REITs, which do not own properties at all. Instead, they lend money to real estate developers and owners, and they earn income from the interest on those loans. Mortgage REITs behave differently from property-owning REITs and carry different risks.

Why people invest in REITs

REITs offer three main attractions. First, they provide regular income through distributions, often higher than you would get from dividend stocks or bonds. Second, they give you exposure to real estate without the capital requirement or work of owning property directly. Third, real estate often moves independently of stocks and bonds, so REITs can diversify a portfolio.

Real estate also tends to hold its value during inflation. When prices rise, rents rise too, and so do REIT distributions. That makes REITs appealing to investors worried about inflation eroding their money over time.

For people who want real estate in their portfolio but do not have the cash to buy a property or the time to manage tenants, REITs offer a simpler path. You get the income and the inflation protection without the landlord responsibilities.

Tax treatment of REIT distributions

REIT distributions are taxed as ordinary income, not as capital gains. That is a critical difference. If you receive a $1,000 dividend from a regular stock and hold it for more than a year, you may pay capital gains tax at a lower rate. If you receive a $1,000 distribution from a REIT, you pay ordinary income tax at your regular tax rate, which is usually higher.

This makes REITs less tax-efficient than many other investments. Many investors hold REITs in tax-advantaged retirement accounts — IRAs, 401(k)s, and similar accounts — where the distributions are not taxed until you withdraw the money. In a regular taxable account, REIT distributions can create a significant tax bill.

You will receive a Form 1099-DIV each year showing how much you received in distributions. Some of that income may be classified as return of capital, which is taxed differently, so read the form carefully or consult a tax professional.

Risks of investing in REITs

REIT share prices can fall just like any stock. If interest rates rise, investors often move money out of REITs and into bonds, pushing REIT prices down. If the real estate market weakens and rents fall, REIT distributions shrink. If a REIT owns properties in a declining area, it may struggle to find tenants or may have to lower rents to fill vacancies.

REITs also carry leverage risk. Many REITs borrow money to buy properties, betting that rental income will exceed the cost of debt. When interest rates rise, that debt becomes more expensive, and profits shrink. A REIT with high debt is riskier than one with low debt.

Individual properties can also fail. A major tenant may leave, a building may need expensive repairs, or a natural disaster may damage a property. Diversified REITs spread this risk across many properties, but concentrated REITs that own only a few buildings or focus on one region carry more risk.

How to buy REIT shares

You buy REIT shares through a brokerage account — the same kind you use to buy stocks. Open an account with a broker like Fidelity, Vanguard, Charles Schwab, or any other major firm. Fund the account with cash. Search for the REIT by its ticker symbol. Place a buy order for as many shares as you want. The transaction settles in two business days, and the shares appear in your account.

You can also buy REITs through mutual funds or exchange-traded funds (ETFs) that hold multiple REITs. This approach gives you when ready diversification across many REITs and property types without having to pick individual REITs yourself. A REIT index fund, for example, holds dozens of REITs and tracks the overall REIT market.

Some REITs are not publicly traded. These are called non-traded or private REITs, and they are sold through financial advisors rather than on stock exchanges. They are less liquid — harder to sell quickly — and often carry higher fees. Most individual investors stick with publicly traded REITs.

Frequently Asked Questions

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

No. You can buy and sell REIT shares whenever you want, just like any stock. There is no minimum holding period. However, if you sell at a loss, you cannot claim that loss if you buy the same REIT again within 30 days (the wash-sale rule applies to REITs like any other security).

Can I lose money on a REIT?

Yes. The share price can fall if interest rates rise, the real estate market weakens, or the REIT performs poorly. You can also lose money if the REIT cuts its distribution or if the properties it owns decline in value. REIT shares are not may provide.

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

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

Do I get paid if I own REIT shares in a retirement account?

Yes. Distributions are paid to your account regardless of whether it is a regular brokerage account or a retirement account like an IRA. The difference is that in a retirement account, you do not pay taxes on the distributions until you withdraw money in retirement.

How often do REITs pay distributions?

Most REITs pay distributions quarterly, meaning four times per year. Some pay monthly or semi-annually. The frequency varies by REIT. Check the REIT's investor relations page or your brokerage statement to see the payment schedule.